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Faculty and Deans
2017
Simplexity: Plain Language and the Tax Law
Joshua D. Blank
New York University School of Law
Leigh Osofsky
University of Miami School of Law, [email protected]
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Recommended Citation
Joshua D. Blank and Leigh Osofsky, Simplexity: Plain Language and the Tax Law, 66 Emory L.J. 189 (2017).
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SIMPLEXITY: PLAIN LANGUAGE AND THE TAX LAW
Joshua D. Blank*
Leigh Osofsky**
ABSTRACT
In recent years, federal government agencies have increasingly attempted
to use plain language in written communications with the public. The Plain
Writing Act of 2010, for instance, requires agencies to incorporate "clearand
simple" explanations of rules and regulations into their official publications.
In the tax context, as part of its "customer service" mission, the Internal
Revenue Service bears a "duty to explain" the tax law to hundreds of millions
of taxpayers who file tax returns each year. Proponents of the plain language
movement have heralded this form of communication as leading to simplicity
in tax compliance, more equitable access to federal programs, and increased
open government.
This Article casts plain language efforts in a different light. As we argue,
rather than achieving simplicity, which would involve reform of the underlying
law, the use ofplain language to describe complex legal rules and regulations
often yields "simplexity. " As we define it, simplexity occurs when the
government presents clear and simple explanations of the law without
highlighting its underlying complexity or reducing this complexity through
formal legal changes. We show that in its numerous taxpayer publications,the
IRS frequently uses plain language to transform complex, often ambiguous tax
law into seemingly simple statements that: (1) present contested tax law as
clear tax rules, (2) add administrative gloss to the tax law, and (3) fail to fully
explain the tax law, including possible exceptions. Sometimes these plain
. Professor of Tax Law, Vice Dean for Technology-Enhanced Education and Faculty Director of the
Graduate Tax Program, New York University School of Law.
Professor of Law, University of Miami School of Law. We are grateful to Joseph Bankman, Andrew
Blair-Stanek, Yariv Brauner, Kathleen DeLaney Thomas, Michael Froomkin, Jacob Goldin, Itai Grinberg,
Kristin Hickman, David Kamin, Sarah Lawsky, Omri Marian, Alex Raskolnikov, Joel Slemrod, and
participants in colloquia at Columbia Law School, University of Florida Levin College of Law, Tulane Law
School, UC Irvine School of Law, and in presentations at the 2015 National Tax Association Annual
Conference, 2015 Junior Tax Scholars Workshop, and the 2015 Law and Society Association Annual Meeting
for thoughtful suggestions and comments on prior drafts. All errors are our own.
EMORY LAW JOURNAL
190
[Vol. 66:189
language explanations benefit the government; at other times, they benefit
taxpayers.
Having introduced the concept of simplexity to the legal literature, we
show how the IRS' use of simplexity poses a trade-off between representing
the tax law accurately and making it understandable to the public. We offer
approaches for preserving some of the benefits of simplexity while also
responding to some of its drawbacks. We also forecast the likely emergence of
simplexity in potentialfuture tax compliance measures, such as governmentprepared tax returns, interactive tax return filing, and increased third-party
reporting.
INT R O D U C TIO N ..............................................................................................
19 1
196
The IRS as Customer Service Organization .............................. 197
ExplanationApproaches ...........................................................
199
In Praise ofPlainLanguage ......................................................
202
II. SIMPLEXITY IN IRS PUBLICATIONS ....................................................
204
A . What Is Simplexity ? ...................................................................
205
B. Categoriesand Examples ..........................................................
207
1. PresentingContested Tax Law as Clear Tax Rules ............. 207
a. Deductibility of Ordinary and Necessary Business
Exp enses .......................................................................
2 07
b. Deductibility ofHome Mortgage Refinancing Points ... 210
c. Tax CharacterizationofLeveragedLeases .................. 212
2. Adding Administrative Gloss to the Tax Law ...................... 214
a. CapitalizationofImprovements .................................... 214
b. Exclusion of Gainfrom Sale ofPrincipalResidence .... 217
c. Multiple IndividualRetirement Account Rollovers ....... 219
3. Failingto Fully Explain the Tax Law .................................. 221
a. B arteringDeductions ...................................................
221
b. Early IndividualRetirement Account Distributions ..... 224
c. CharacterizationofActivity as Profit-Seeking ............. 226
C. Taxpayer Exposure to Simplexity ..............................................
228
III. IS SJM PLEXITY SOUND ? ................................. .. . .. . .. . .. .. . .. . .. . .. .. . .. . .. . .. . .. . 234
A . B en efits ......................................................................................
2 34
1. Tax Law in PlainLanguage ................................................
234
2. Visibility into the IRS's Views of the Tax Law ..................... 235
3. Administration and Revenue Benefits .................................. 236
B . Threats .......................................................................................
2 37
I.
THE DUTY TO EXPLAIN THE TAX LAW ...............................................
A.
B.
C.
SIMPLEXITY
2017]
1. Reduced Tax Transparency .................................................
2. Unequal Benefits and Burdens ............................................
3. Inadequacy ofAdministrative Law to Police Threats ..........
C. The Trade-Off ............................................................................
D. P otentialR esponses ...................................................................
1. R ed-Flagging .......................................................................
2. Review of IRS Publications .................................................
3. StructuralR eform ................................................................
E. The Future of Tax Administration .............................................
C O N C L U SIO N ..................................................................................................
237
242
245
250
251
252
256
258
259
26 3
INTRODUCTION
Imagine it is April 15th, "Tax Day," and as the sole owner of a local pizza
shop, you are racing to complete your annual tax return before the U.S. Post
Office closes. Specifically, you are trying to decide whether you can claim a
tax deduction for a $6000 expense you paid last winter to fix your restaurant's
copper piping, which was damaged as a result of a flood. (Your expenses for
plumbing are usually around $3000 annually.) You understand from the owner
of the barbecue restaurant next door that his accountant recently told him he
could not deduct expenses for "improvements."' Now imagine that you read
the following two statements, the first of which is from Treasury regulations
and the second of which is from an IRS publication regarding business
expenses:
Statement 1: "Requirement to capitalize amounts paidfor improvements.
Except as provided in paragraph (h) or paragraph (n) of this
section or under § 1.263(a)-l(f), a taxpayer generally must
capitalize the related amounts (as defined in paragraph (g)(3)
of this section) paid to improve a unit of property owned by
the taxpayer."2
Statement
2: "Improvements. Improvements are generally major
expenditures. Some examples are new electric wiring, a new
roof, a new floor, new plumbing, bricking up windows to
3
strengthen a wall, and lighting improvements."
1 I.R.C. § 263(a)(1) (2012).
2 Treas. Reg. § 1.263(a) 3(d) (as amended in2014).
3 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. No. 535, BUSINESS EXPENSES 3 (2016).
192
EMORY LAW JOURNAL
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As you struggle to make a decision about whether to deduct the copper piping
expense, which of these two statements is more helpful to you?
If you are like most people, you will most likely find Statement 2 to be far
more helpful than Statement 1. After reading Statement 2, you may decide that
your expense was a "major expenditure"-it was double your usual expenseand, as a result, you cannot claim the deduction. This conclusion, however, is
not necessarily correct. The "major expenditure" standard in Statement 2, from
the IRS publication, 4 does not appear anywhere in the Internal Revenue Code
or Treasury regulations. Further, the provisions that Statement 1, from the
Treasury regulations,5 references contain specific examples that provide
support for allowing you to deduct the expense immediately.6 While
Statement 2 may help you to make a decision regarding the deduction, this
decision may not be consistent with the tax law.
As this hypothetical illustrates, the IRS often attempts to explain tax law
that consists of complex, ambiguous statutory rules and administrative
regulations using terms that are "[c]lear and simple" 7 to most taxpayers. While
the IRS assesses and collects over three trillion dollars in tax liability annually
as a tax enforcement agency,8 the agency also assists hundreds of millions of
taxpayers each year 9 in its dual role as a customer service organization.' 0 In
l
this latter capacity, the IRS bears a duty to explain the tax law to taxpayers,"
and taxpayers, likewise, possess the right to be informed by the IRS about the
tax law. 12 Further, as a result of the implementation of the Plain Writing Act of
2010, spearheaded by Cass Sunstein in his role as Administrator of the Office
4 Id.
5 Treas. Reg. § 1.263(a) 3(d).
6 See, e.g., Treas. Reg. § 1.263(a) 3(k)(7) ex. 23 (as amended in 2014).
7 OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, MEMORANDUM NO. M-11-15, FINAL
GUIDANCE ON IMPLEMENTING THE PLAIN WRITING ACT OF 2010 (2013).
8 See The Agency, Its Mission and Statutory Authority, INTERNAL REVENUE SERV., https://www.irs.gov/
uac/the-agency-its-mission-and-statutory -authority (last updated July 27, 2016).
9 NAT'L TAXPAYER ADVOCATE, 1 ANNUAL REPORT TO CONGRESS 5 (2014), http://www.
TaxpayerAdvocate.irs.gov/2014AnnualReport.
10 See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 1205,
112 Star.
685, 722 23 (1998); see also Leandra Lederman, Tax Compliance and the Reformed IRS, 51 KAN. L.
REV. 971, 980 (2003) (describing congressional efforts to make the IRS more "'customer'-fiendly").
11 See, e.g., I.R.S.
News Release IR-98-59, New IRS Mission Statement Emphasizes Taxpayer Service
(Sept. 24, 1998), https://www.irs.gov/pub/irs-news/ir-98-59.pdf; Fact Sheet FS-2015-3, Taxpayer Bill of
Rights #1, The Right to Be Informed, INTERNAL REVENUE SERV. [hereinafter BILL OF RIGHTS],
https://www.irs.gov/uac/newsroom/taxpayer-bill-of-ights-number-l-the-night-to-be-informed
(last updated
Jan. 2015); see also intraPart II.A.
12 See Plain Writing Act of 2010, Pub. L.No. 111-274, § 2, 124 Stat. 2861, 2861 (2010).
2017]
SIMPLEXITY
of Information and Regulatory Affairs, 3 the IRS must use plain language to
convey the tax law in "easily understandable language on all of [its] forms,
publications, documents and notices." 4 Sunstein and others have heralded
initiatives like the Plain Writing Act as increasing "simplicity," 15 which they
argue enables taxpayers to self-assess their own tax liability, ensures equal
access to information about government programs and services, and increases
government transparency.16 As Sunstein has noted, the introduction of plain
language in government communications should "promote clarity, because it is
designed to ensure that when government communicates
with citizens, it does
17
so in a way that people can easily understand."
This Article casts plain language efforts in a different light. As we argue,
rather than achieving simplicity, which would involve reform of the underlying
law,' 8 the use of plain language to describe complex legal rules and regulations
often yields "simplexity." As we define it, simplexity occurs when the
government presents clear and simple explanations of the law without
highlighting its underlying complexity or reducing this complexity through
formal legal changes. Outside of law, simplexity is a concept that has emerged
in recent years in diverse fields, including chemistry 19 and biology, 20 cognitive
23
22
psychology, 2 1 literary analysis, and even computer-animated feature films.
We show that in its numerous taxpayer publications, the IRS frequently uses
plain language to transform complex, often ambiguous tax law into seemingly
simple statements that: (1) present contested tax law as clear tax rules, (2) add
13 CASS R. SUNSTEIN, SIMPLER: THE FUTURE OF GOVERNMENT 185 (2013).
14 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. NO. 5206, PLAIN WRITING ACT
COMPLIANCE REPORT 2 (2015).
15 SUNSTEIN, supra note 13, at 185 (2013); see also OFFICE OF MGMT. & BUDGET, supra note 7.
16 See infra Part II.C.
17 SUNSTEIN, supra note 13, at 185.
18 See OFFICE OF THE SEC'Y, DEP'T OF TREASURY, 1 TAx REFORM FOR FAIRNESS, SIMPLICITY, AND
ECONOMIC GROWTH 16 (1984); inranotes 96 101 and accompanying text.
19 See, e.g., Phillippe Compain, Le part de lasimplexite: Le simple etlecomplexe en synthese organique
[The Challenge of Simplexity: The Simple and the Complex in Organic Synthesis], 265 L'ACTUALITE
CHIMIQUE, Apr. May 2003, at 129, 129.
20 See, e.g., JEFFREY KLUGER, SIMPLEXITY: WHY SIMPLE THINGS BECOME COMPLEX (AND How
COMPLEX THINGS CAN BE MADE SIMPLE) (2008).
21 Serge Gelalian, Is Modeling the PrimaryActivity of the Human Brain?, 3 PSYCHOL. RES. 175, 184
(2013).
22 See, e.g., ALAIN BERTHOZ, SIMPLEXITY: SIMPLIFYING PRINCIPLES FOR A COMPLEX WORLD 208
(Giselle Weiss trans. 2012).
23 TIM HAUSER, THE ART OF UP 18 (2009) (quoting Pixar animator Ricky Nierva as stating,
"[Simplexity] is the art of simplifying an image down to its essence ....'Simplexity' is about selective
detail").
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[Vol. 66:189
administrative gloss to the tax law, and (3) fail to fully explain the tax law,
including possible exceptions. We refer to these descriptions as "IRS
simplifications." Sometimes IRS simplifications benefit the government; at
other times, they benefit taxpayers. In either case, simplexity offers a powerful
platform from which the government can shape taxpayers' perceptions and
understanding of the tax law.
Having introduced the concept of simplexity, we explain how the IRS's use
of simplexity poses a trade-off between representing the tax law accurately and
making it understandable to the public. There is no single way this trade-off
should be resolved. Rather, resolving the trade-off will depend on value
judgments as to whether the right balance of accuracy and understandability
has been reached in a given case. The trade-off is animated by offsetting
benefits and costs from simplexity. In particular, while simplexity offers a
number of potential tax administration benefits, it can also threaten vital values
of democratic governance and fairness. 24 On the one hand, IRS simplifications
explain otherwise complex tax law in terms that are comprehensible for a large
swath of taxpayers. They also reveal the IRS's own interpretation of the tax
law and its likely auditing or litigating position in the event of a tax
controversy. And where taxpayers respond to government-favorable IRS
simplifications by refraining from claiming aggressive tax positions, they
enable the IRS to increase collection of tax revenue. On the other hand, by
describing the tax law in seemingly straightforward terms, IRS simplifications
can have the unintended effect of obscuring individuals' knowledge of the
underlying tax law, as it exists in the Internal Revenue Code, Treasury
regulations, and case law. In addition, IRS simplifications can impose unequal
benefits and burdens on different types of taxpayers. Sophisticated taxpayers
possess the ability to reject IRS simplifications that benefit the government,
while all taxpayers, sophisticated and unsophisticated, will follow IRS
simplifications that favor taxpayers. Further, administrative law does not offer
an adequate solution to the problems posed by IRS simplifications, leaving
significant threats of opacity and inequity largely unchecked.25
This Article does not contend that the IRS should abandon plain language.
Rather, we offer several strategies for maximizing the tax administration and
compliance benefits of simplexity while minimizing its drawbacks. 26 First, we
24 See infra Parts III.A and III.B.
25 Id.
26 See infra Part IIID.
2017]
SIMPLEXITY
195
explore the possibility of mandating that the IRS either annotate or red-flag its
own simplifications in IRS publications.27 As we demonstrate, in addition to
reducing opacity, these methods still allow the IRS to speak in plain language
to taxpayers and set forth its own views, and even allow the IRS to continue to
maximize revenue collection to the extent that conservative taxpayers follow
the IRS's positions. Next, we discuss how the IRS may rely on institutions or
interest groups outside of the IRS, such as the Government Accountability
Office, or the tax law bar, to review IRS simplifications and accompanying
annotations and red-flagging. 28 Last, we consider potential structural reform of
the IRS, including the creation of an independent taxpayer service
organization.29
Finally, we forecast the likely emergence of simplexity in the future of tax
administration. 30 Tax scholars and policymakers have made a variety of
suggestions for how tax administration can and should change in the coming
decades. For example, scholars and policymakers have suggested that the
government should prepare individuals' tax returns (using information it
already possesses), 3 1 develop interactive tax return filing programs, 32 and
continue to expand the role of third party information reporting, 33 all
suggestions that have begun to be implemented in the tax system in varying
degrees.34 Simplexity is likely to arise in each of these innovations. As a result,
our suggestions for minimizing the threats while maintaining the benefits of
simplexity will become increasingly important.
The remainder of this Article proceeds as follows. Part I discusses the
IRS's customer service obligations, including its duty to explain the tax law,
27
28
29
30
31
See infra Part III.D.
1.
See infra Part III.D.2.
See infra Part III.D.3.
See infra Part III.E.
See, e.g.,
Joseph Bankman, Simple FilingforAverage Citizens: The CaliforniaReadyReturn, 107 TAX
NOTES 1431 (2005); AUSTAN GoOLSBEE, BROOKINGS INST., THE 'SIMPLE RETURN': REDUCING AMERICA'S
TAX BURDEN THROUGH RETURN-FREE FILING (2006); Rodney P. Mock & Nancy E. Shurtz, The TurboTax
Defense, 15 FLA. TAx REV. 443, 528 29 (2014); Dennis J.Ventry Jr.,
Americans Don 'tHate Taxes, They Hate
Paying Taxes, 44 U.B.C. L.REv. 835, 842 (2011).
32 See, e.g., Joseph Bankman, Clifford Nass & Joel Slemrod, Using the "SmartReturn" to Reduce Tax
Evasion (Stanford Pub. Law, Working Paper No. 2578432, 2015), ht://papers.ssm.com/sol3/papers.cfm?
abstractid-2578432; Mock & Shurtz, supra note 31; Kathleen DeLaney Thomas, User-Friendly Taxpaying,
92 IND. LJ.(forthcoming).
33 For a list of current information-reporting requirements, see Information Return Reporting, INTERNAL
REVENUE SERV., https://www.irs.gov/businesses/small-businesses-self-employed/infoyrmation-retum-reporting
(last updated May 17, 2016).
31 See infra Part III.E.
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and examines the rationale underlying the plain language movement in the tax
context. Part II introduces the concept of simplexity to the legal literature and
offers examples of IRS simplifications that fall into several common
categories. Part III examines the benefits and drawbacks of simplexity, offers
suggestions for reform, examines potential simplexity in future tax
administration initiatives, and is followed by the Conclusion.
I. THE DUTY TO EXPLAIN THE TAx LAW
Among its core functions, the IRS seeks to promote voluntary compliance
with the tax law, reviews hundreds of millions of tax returns, and assesses and
collects over three trillion dollars in tax revenue annually. 35 In recent years, the
IRS has faced criticism regarding its exercise of tax enforcement discretion,
such as that the agency fails to enforce the tax law in certain cases (e.g.,
refraining from taxing employees on frequent flyer miles accumulated through
business travel), 36 under-enforces the tax law (e.g., declining to audit large
partnerships and small cash businesses), 37 and enters into secret deals with
taxpayers (e.g., advance pricing agreements that enable multinational
corporations to reduce their global tax liability by billions of dollars). 38 In
response, several scholars have called for new institutional oversight and
39
judicial review of the IRS's exercise of discretion in enforcing the tax law.
In addition to its tax enforcement obligations, the IRS is also required to
provide "customer service" 40 assistance to taxpayers. The IRS bears an
affirmative duty to assist both individuals and businesses in complying with
their tax calculation and payment obligations, specifically by explaining the tax
law to taxpayers in plain language that is clear and easy to understand. In
35 See
The Agency, Its Mission andStatutory Authority, supra note 8.
36 See Lawrence Zelenak, Custom and the Rule ofLaw in the Administration of the Income Tax, 62 DUKE
LJ. 829, 831 (2012).
37 See, e.g., Joseph Bankman, Eight Truths About Collecting Taxes from the Cash Economy, 117 TAX
NoTEs 506, 514 (2007); Amy S.Elliott, Audit Proof? How Hedge Funds, PE Funds, and PTPs Escape the
IRS, 136 TAXNoTEs 351, 351 52 (2012).
38 See, e.g., Lee A. Sheppard, Draft Senate Finance APA Report Shows Incompetent IRS, 2005 TAX
NoTEs TODAY, at 119-1; see also Leigh Osofsky, Some Realism About Responsive Tax Administration, 66 TAX
L.REV. 121 (2012).
39 See, e.g., Samuel D. Brunson, Watching the Watchers: Preventing IR.S.Abuse of the Tax System, 14
FLA.TAX REV. 223, 254 55 (2013); Richard C.Stark, Hartman E. Blanchard Jr.
& Saul Mezei, Consistency,
Sunshine, Privacy,Secret Law, and theAPA Program,2011 TAx NoTEs TODAY 26-3; Zelenak, supra note 36,
at 851 53.
40 Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 1205, 112
Stat. 685, 722 23 (1998).
2017]
SIMPLEXITY
comparison with their extensive focus on the IRS's role as a tax enforcement
organization, policymakers, tax scholars, and other commentators have
devoted far less attention to the IRS's role as a customer service organization,
41
including the IRS's approaches to fulfilling its duty to explain the tax law.
This Part discusses the IRS's customer service obligations, reviews the
agency's multiple approaches to explaining the tax law to taxpayers, and
considers the rationale for imposing a duty to explain upon the IRS.
A.
The IRS as Customer Service Organization
In its customer service capacity, the IRS has a central duty to explain the
tax law to taxpayers. As the IRS describes it, its mission is to "help the large
majority of compliant taxpayers with the tax law, while ensuring that the
minority who are unwilling to comply pay their fair share." 42 Notably, this
mission statement references helping taxpayers comply before referencing tax
enforcement. 43 Explaining the tax law to taxpayers has become an important
way in which the IRS fulfills this service mission. The IRS's customer service
obligations arise from several legislative and executive mandates.
The 1998 IRS Reforms. In 1998, largely in response to perceived abuses of
enforcement discretion by IRS officials, 44 Congress enacted major reforms to
heighten the IRS's emphasis on "customer service." 45 Following the enactment
of these changes, the IRS adopted a new mission statement: "[P]rovide
America's taxpayers top quality service by helping them understand and meet
their tax responsibilities and by applying the tax law with integrity and fairness
41 Some commentators have focused on the importance of IRS guidance generally. See, e.g., NAT'L
TAXPAYER ADVOCATE, 2013 ANNUAL REPORT TO CONGRESS: EXECUTIVE SUMMARY: PREFACE AND
HIGHLIGHTS 44 (2013). Some recent work has focused on taxpayers' legal ability to rely on IRS publications
in support of their tax positions. See, e.g., Emily Cauble, DetrimentalRelianceon IRS Guidance, 2015 WIS. L.
REv. 421; Dashiell C. Shapiro, Can Taxpayers Rely on IRSForm Instructions?, 149 TAx NOTES 945 (2015).
42 The Agency, Its Mission and Statutory Authority, supra note 8.
43 See I.R.S. News Release IR-98-59, New IRS Mission Statement Emphasizes Taxpayer Service
(Sept. 24, 1998), https://www.irs.gov/pub/irs-news/ir-98-59.pdf
44 See, e.g., IRS Oversight: HearingsBefore the S. Comm. on Fin., 105th Cong. 1 (1998) (statement of
Sen. William V. Roth, Jr., Chairman, S. Comm. on Finance); Ryan J. Donmoyer, Three Days of Hearings
Paint Picture of Troubled IRS, 76 TAx NOTES 1655, 1655-66 (1997). Later investigations revealed many of
these stories to be exaggerated. See U.S. GEN. ACCOUNTING OFFICE, GAO/GGD-99-82, TAX
ADMINISTRATION: ALLEGATIONS OF IRS EMPLOYEE MISCONDUCT 3, 19 (1999).
45 Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 1205, 112
Stat. 685, 722 23; see also Lederman, supra note 10, at 992 93.
198
EMORY LAW JOURNAL
[Vol. 66:189
to all."-4 6 The IRS implemented its new mission by shifting personnel and other
resources away from tax enforcement and toward taxpayer service, making
service of taxpayers a major part of the IRS's role, 47 a change that has lasted
48
well past the 1998 IRS restructuring.
Plain Writing Act of 2010. Statutory developments since 1998 reinforce
and expand the IRS's duty to explain the tax law to taxpayers. The IRS, like
other federal agencies, is subject to the requirements of the Plain Writing Act
of 2010, a statutory framework that seeks "to improve the effectiveness and
accountability of Federal agencies to the public by promoting clear
Government communication that the public can understand and use." 49 Under
this statute, the IRS must use "plain writing" in its communication with
taxpayers, meaning that it must provide written explanations and instructions
that are "clear, concise, well-organized, and follow[] other best practices
appropriate to the subject or field and intended audience." 50 Congress
specifically applied its plain writing framework to documents related to "filing
taxes," including IRS publications. 51 Following enactment of the Plain Writing
Act, IRS officials indicated that the agency would "communicate in clear,
easily understandable language on all of our forms, publications, documents
52
and notices."
Taxpayer Bill of Rights. In 2014, at the urging of the National Taxpayer
Advocate, the IRS adopted a "Taxpayer Bill of Rights," a clear description of
ten categories of existing rights to which taxpayers are entitled under various
46 I.R.S.
News Release IR-98-59, New IRS Mission Statement Emphasizes Taxpayer Service (Sept. 24,
1998), https://www.irs.gov/pub/irs-news/ir-98-59.pdf.
47 Numerous scholars have suggested that this change has had a negative impact on the IRS's
enforcement capacity. See, e.g., Bryan T. Camp, Tax Administration as InquisitorialProcess and the Partial
Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 FLA. L. REV. 1, 117 28 (2004);
Lederman, supra note 10, at 982 90; see also DAVID CAY JOHNSTON, PERFECTLY LEGAL: THE COVERT
CAMPAIGN TO RIG OUR TAX SYSTEM TO BENEFIT THE SUPER RICH AND CHEAT EVERYBODY ELSE 293 95
(2003) (criticizing 1998 reforms); U.S. GEN. ACCOUNTING OFFICE, GAO-02-674, TAX ADMINISTRATION:
IMPACT OF COMPLIANCE AND COLLECTION PROGRAM DECLINES ON TAXPAYERS, 10 30 (2002) (detailing post1998 reductions in tax enforcement).
48 Service remains a major partof the IRS's mission today. See The Agency, Its Mission and Statutory
Authority, supra note 8.
49 Plain Writing Act of 2010, Pub. L. No. 111-274, § 2, 124 Stat. 2861, 2861 (2010); see also Exec.
Order No. 13,563, 3 C.F.R.§ 13563 (2011).
50 Pub. L.No. 111-274, § 3(3) (2010).
"i Pub. L.No. 111-274, § 3(2)(A)(i).
52 INTERNAL REVENUE SERV., supra note 14, at 2.
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SIMPLEXITY
199
53
provisions of the Internal Revenue Code and other statutory authorities.
Starting in 2014, the IRS publicized the Taxpayer Bill of Rights on its website
and in a special publication, Your Rights as a Taxpayer. The first of the ten
enumerated rights is that all taxpayers possess "[t]he [r]ight to [b]e
[i]nformed., 54 In describing this right, the IRS states that taxpayers have the
right to "clear explanations of the laws and IRS procedures in all tax forms,
55
instructions, publications, notices, and correspondence. "
A significant way in which the IRS helps taxpayers "understand and meet
their tax responsibilities" 56 is through the issuance of IRS publications to the
general public. IRS publications are the primary documents that the agency
uses to describe the tax law to individuals, small businesses, and tax
professionals, and, as a result, they exemplify the IRS's provision of guidance
in service of taxpayers. IRS publications often include a variety of explanatory
information, general guidance, definitions for important terms, and examples
57
intended to show taxpayers how the law applies.
B. ExplanationApproaches
To satisfy its duty to explain the tax law, the IRS adopts several
communication approaches in IRS publications. These methods result from the
IRS's own policies and from guidance implementing the Plain Writing Act
(Plain Language Guidelines) issued by the Office of Information and
58
Regulatory Affairs (OIRA) within the Office of Management and Budget.
Tailoring Explanations for a Specific Audience. The IRS openly
acknowledges that when drafting IRS publications, the agency adjusts its
language depending on whether members of the general public or tax
professionals are potential audience members. 59 For publications that it intends
to direct to the general public, the IRS states that the "plain language [it] use[s]
53 I.R.S. News Release IR-2014-72 (June 10, 2014), https://www.irs.gov/uac/newsroom/irs-adoptstaxpayer-bill-of-nights-10-provisions-to-be-highlighted-on-irsgov-in-publication- 1.
54 INTERNAL REVENUE SERv., PUB. No. 1, YOUR RIGHTS AS A TAXPAYER: THE TAXPAYER BILL OF
RIGHTS (2014), http://www.irs.gov/pub/irs-pdf/pl.pdf
55 Id.
56 I.R.S. News Release, supra note 11.
57 See Forms & Publications, INTERNAL REVENUE SERV., http://www.irs.gov/forms-pubs (last updated
June 28, 2016).
58 OFFICE OF MGMT. & BUDGET, supra note 7; PLAIN LANGUAGE ACTION & INFO. NETWORK, FEDERAL
PLAIN LANGUAGE GUIDELINES, (Mar. 2011, revised May 2011), http://www.plainlanguage.gov/howto/
guidelines/FederalPLGuidelines/FedemlPLGuidelines.pdf
59 See INTERNAL REVENUE SERV., supra note 14, at 3.
[Vol. 66:189
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for this group is clear, simple and meaningful" because "this group does not
have a need to understand technical regulatory language." 6 When addressing
tax professionals, such as tax accountants, tax return preparers or tax lawyers,
the IRS includes more61 specialized terminology than in publications intended
for the general public.
Eliminating Complexity. As part of its efforts to help taxpayers understand
the tax law and to comply with the Plain Writing Act, the IRS attempts to
avoid complexity in drafting IRS publications. According to the Plain
Language Guidelines, the IRS should "translate complicated provisions into
more manageable language"62 by avoiding discussion of complex details and
discussions in these documents. For example, the guidelines state that the IRS
should avoid emphasizing exceptions to the tax law because
[w]hen you start a sentence with an introductory phrase or clause
beginning with "except," you almost certainly force the reader to reread your sentence .... The audience must absorb the exception, then
the rule, and then
usually has to go back to grasp the relationship
63
between the two.
In contrast, rather than restating the tax law precisely as it appears in statutes or
regulations, the guidelines instruct the IRS to rewrite sentences to "emphasize
the positive. '64 Following enactment of the Plain Writing Act, the IRS has
reported that it has rewritten and redesigned dozens of IRS publications in
' 65
order "to improve comprehension."
Evaluating the Impact on the Taxpayer and the IRS. IRS officials also
consider the potential impact of the language they use in IRS publications on
different parties, including the IRS itself The Plain Language Guidelines
suggest that when drafting IRS publications for the general public or tax
professionals, IRS officials should ask, "What's the best outcome for our
audience? What do I need to say to get this outcome? ' 66 Likewise, the IRS is
also instructed to consider how the text in any IRS publication may benefit the
60
Id.
61 See id.
62
PLAIN LANGUAGE ACTION & INFO. NETWORK, supra note 58, at 50.
63 Id. at 56.
64 Id. at 55.
65
See INTERNAL REVENUE SERV., supra note 14, at 4.
66
PLAIN LANGUAGE ACTION & INFO. NETWORK, supra note 58, at
2.
SIMPLEXITY
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IRS. The guidelines instruct IRS officials to ask themselves: "What's the best
outcome for my agency? What do I need to say to get this outcome?" 67
While the IRS is not the only federal agency with a duty to explain the law
through clear communication, 68 several aspects of the IRS's responsibilities
make this duty both more challenging and impactful in the tax context than in
other areas. First, compared to other agencies, the IRS must address more
69
individuals and businesses on a regular basis through its publications.
According to the IRS, the agency designs its publications to be comprehensible
to a mass audience, 150 million taxpayers annually. 70 As commentators have
observed, more U.S. citizens pay taxes each year than vote in presidential
elections. 71 Second, the tax law is arguably more complex than many other
areas of the law. As the Joint Committee on Taxation has concluded, unique
complexity in the federal tax law "make[s] it more difficult for the IRS to
"72
explain the law to taxpayers in a concise and understandable manner ....
Last, no other federal agency requires as many individuals to self-assess their
own compliance with the law and then file an annual report of this assessment
with the federal government as the IRS.73 Scholars and policymakers have long
noted that the requirement to file the annual Form 1040, the individual income
tax return, is perhaps the most significant burden that the government imposes
on individuals. 74 The IRS thus faces a uniquely challenging and significant
task in attempting to satisfy its duty to explain the tax law to taxpayers using
plain language.
Id. (emphasis added).
68 See SUNSTEIN, supra note 13 (regarding Plain Writing Act of 2010); see also David Zaring, Best
67
Practices, 81 N.Y.U. L. REV. 294, 296 97 (2006) (discussing extensive use of "best practices" by federal
agencies).
69 See, e.g., Dobson v. Comm'r, 320 U.S. 489, 494 95 (1943) ("No other branch of the law touches
human activities at so many points.").
70 INTERNAL REVENUE SERV., supra note 14, at 4.
71 See Joshua D. Rosenberg, A Helpful and Efficient IRS: Some Simple and Powerful Suggestions, 88 KY.
L.J. 33, 37 (1999); see also JOINT COMM. ON TAXATION, JCS-3-01, STUDY OF THE OVERALL STATE OF THE
FEDERAL TAX SYSTEM AND RECOMMENDATIONS FOR SIMPLIFICATION, PURSUANT TO SECTION 8022(3)(B) OF
THE INTERNAL REVENUE CODE OF 1986, at 4 (2001).
72
JOINT COMM. ON TAXATION, JCX-26-01, TESTIMONY OF THE STAFF OF THE JOINT COMMITTEE ON
TAXATION
CONCERNING
A STUDY
OF THE
OVERALL
STATE OF THE FEDERAL
TAX
SYSTEM AND
RECOMMENDATIONS FOR SIMPLIFICATION 5 (2001). For further discussion, see MICHAEL J.GRAETz, THE
DECLINE (AND FALL?) OF THE INCOME TAX 49 (1997) (addressing complexity of income tax system); Mock &
Shurtz, supra note 31, at 524 25; Deborah H. Schenk, Simplificationfor Individual Taxpayers: Problems and
Proposals,45 TAXL.REV. 121, 123 (1989).
73 See NAT'L TAXPAYER ADVOCATE, supra note 9, at 8 10.
74 See, e.g., id. at 8; see also Thomas, supra note 32, at 19.
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C. In Praise ofPlain Language
The effort to mandate that the IRS, among other federal agencies, use plain
language in communications with taxpayers in general publications has
received widespread praise. 75 Proponents of the legislation characterized it as
representing "common-sense change" 76 that could be "implemented at low
cost."'7 7 Others predicted that efforts such as this would force federal
government agencies to replace "bureaucratic gobbledygook" 78 with "easy-tounderstand language" 79 throughout their communications. The Plain Writing
Act was enacted with overwhelming bipartisan support in 2010. While some
scholars have begun to study the efficacy of the Plain Writing Act
empirically, 80 and others have questioned whether such policies will indeed
make the law more "understandable,"'" there has been limited, if any,
opposition to the primary objectives motivating these plain language
initiatives. Each of the objectives is described briefly below.
Simplicity and Self-Assessment. The primary rationale for mandating that
the IRS communicate with taxpayers using plain language is that the approach
will result in simplicity, which, in turn, will assist taxpayers in self-assessing
their tax liability and filing their tax returns. Cass Sunstein, the primary
architect of the Plain Writing Act in his role as head of OIRA, has argued that
"[c]lear and simple communication... makes it easier for members of the
public to understand and to apply for important benefits and services for which
they are eligible. 8 2 Sunstein describes the primary rationale for this initiative
as follows: "Simply put, the principle is this: Avoid ambiguity and be specific
about the favored path. 8 3 In the tax context, Sunstein has further noted that the
IRS should provide plain language explanations and instructions in order to
75 See, e.g., Joe Davidson, HiringOfficials Have Finally Heard the Magic Word: Resumes, WASH. POST,
May 12, 2010, at B3.
76 Press Release, Office of Rep. Bruce Braley, Braley Introduces "Plain Language in Health Insurance
Act" to Lower Costs, Cut Confusion, June 25, 2009, htt://www.plainlanguage.gov/news/index.cfmtopic=
ysnHealth.
77 id.
78 Katy Steinmetz, Government Officials May Be Using Less Mumbo Jumbo, TIME (Jan. 27, 2015),
http://time com/3685016/government-plain-witing-2014/.
79 Press Release, Office of Rep. Bruce Braley, supra note 76.
80 See, e.g.,
Cynthia R. Farina, Mary J.Newhart & Cheryl Blake, The Problem with Words: Plain
Language and Public Participation in Rulemaking, 83 GEo. WASH. L. REv. 1358 (2015) (finding mixed
success of the Plain Writing Act).
81 See OMRi BEN-SHAHAR & CARL E. SCHNEIDER, MORE THAN You WANTED TO KNOW: THE FAILURE
OF MANDATED DISCLOSURE 122 (2014).
82 OFFICE OF MGMT. & BUDGET, supra note 7.
83 SUNSTEIN, supra note 13, at 78.
SIMPLEXITY
2017]
"assist the public in complying with applicable requirements simply because
people better understand what they are supposed to do."84 An undisputable
objective of the plain language movement is to make this burden of tax
compliance as simple and "painless as possible."8 5 Indeed, the IRS has
expressed Sunstein's sentiments in the first words of the Taxpayer Bill of
Rights, stating that "[t]axpayers have the right to know what they need to do to
comply with the tax laws."8 6 Plain language is central to the IRS's commitment
that taxpayers enjoy this right.
Equity. The plain language movement also seeks to reduce the potential for
vague tax laws to result in inequitable distribution of tax benefits and burdens
among taxpayers. Without clear explanations of the tax law, plain language
advocates argue, some taxpayers may fail to take advantage of government
benefits for which they may be eligible, such as the Earned Income Tax
Credit 87 or the Child Tax Credit.88 As Sunstein has suggested, "[a] lack of
clarity may prevent people from becoming sufficiently aware of programs or
services, and... may discourage participation."8 9 Conversely, plain language
advocates suggest that without clear instructions from the IRS, some
sophisticated taxpayers may attempt to exploit ambiguities in the tax law to
claim tax benefits that Congress never intended. For example, Nina Olson,
National Taxpayer Advocate, has reported that without clear guidance,
"sophisticated taxpayers often find loopholes that enable them to reduce or
eliminate their tax liabilities." 90 Equity concerns, consequently, have played a
significant role in motivating the IRS's duty to explain the tax law to the
public.
Transparency.A final impetus for the IRS to use plain language is that this
approach may strengthen government transparency. With access to plain
language descriptions of the tax laws, plain language advocates suggest,
citizens can better understand the actions of Congress, the Treasury, and the
OFFICE OF MGMT. & BUDGET, supra note 7.
85 NAT'L TAXPAYER ADVOCATE, supra note 9, at 5.
84
86
BILL OF RIGHTS, supra note
11.
87 I.R.C. § 32 (2012).
88 I.R.C. § 24 (2012).
89
OFFICE OF MGMT.
& BUDGET,
EXEC.
OFFICE OF THE PRESIDENT,
MEMORANDUM M-11-05,
PRELIMINARY GUIDANCE FOR THE PLAIN WRITING ACT OF 2010 (2010).
90 Michelle Singletary, Congress Should Resolve to Simplify the Tax Code, WASH. POST, Jan. 8, 2009, at
D2 (quoting Nina Olson, National Taxpayer Advocate).
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[Vol. 66:189
IRS. 9 They can react to this enhanced knowledge either by accepting or by
questioning the tax laws through public discussion and debate. As Sunstein
noted following the enactment of the Plain Writing Act in 2010, plain language
"should be seen as an essential part of open government." 92
II.
SIMPLEXITY IN
IRS
PUBLICATIONS
There is another side to plain language. While proponents of plain language
argue that it will lead to greater simplicity and administrability of the tax
system, 93 the initiative does not make substantive changes to the myriad
complexities of the tax law-technical details, exceptions (and exceptions to
exceptions), and ambiguous statutory and judicial language. In this Part, we
argue that the IRS's efforts to incorporate plain language into its
communications with taxpayers result not in greater simplicity, but instead in
simplexity. Whereas simplicity eliminates complexity, simplexity offers only
the appearanceof simplicity.
As we show, following an extensive review of IRS publications, the IRS
routinely offers descriptions of the tax law that exhibit simplexity. IRS
publications transform complex, often ambiguous tax law into seemingly
simple, straightforward statements (which we describe as "IRS
simplifications"). Sometimes IRS simplifications benefit the government. At
other times, they benefit taxpayers. In any event, the mandate to describe the
tax law using plain language provides the IRS with a unique and influential
ability to shape taxpayers' and tax practitioners' perceptions and understanding
of the tax law.
This Part introduces the concept of simplexity to the tax literature, provides
examples in IRS publications that fall into several common categories, and
shows how taxpayers who complete their tax returns in various different ways
are repeatedly exposed to simplexity.
91 See, e.g., OFFICE OF MGMT. & BUDGET, supra note 89 ("Transparency, public participation, and
collaboration cannot easily occur without plain writing."); see also SUNSTEIN, supra note 13; Joel Siegel,
Obama Signs Plain Writing'Law, ABCNEWS (Oct. 17, 2010), http://abcnews.go.com/WN/obama-signs-lawunderstand/storyid-11902841 (quoting Rep. Bruce Braley, D-Jowa, as stating that "plain language will
increase government accountability").
OFFICE OF MGMT. & BUDGET, supra note 89.
93 See SUNSTEIN, supra note 13, at 185.
92
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A.
SIMPLEXITY
205
What Is Simplexity?
While there is no universal definition of simplexity, representative
descriptions include "the process of simplifying something by obscuring the
more complex aspects of the original goal' 94 and "an idea, or concept that
appears to be simple to understand, yet is very complex in it's [sic] true
description." 95 In this subpart, we distinguish simplexity from simplicity,
provide several examples of simplexity in non-legal contexts, and define our
usage of the term in this Article.
Before defining simplexity, it is necessary to consider simplicity. The
dictionary definition of simplicity refers to the "state of being simple,
uncomplicated, or uncompounded., 96 In his recent book, Simpler: The Future
of Government, Cass Sunstein notes that the overarching goal of the "largescale transformation in American government" 97 that occurred as a result of
initiatives such as the Plain Writing Act was to "increase simplicity" 98 through
the government's communications with the public. In the context of
fundamental tax reform, government officials have defined simplicity in the
negative by stating that it is "not reflected in [taxpayers] .... computing
dozens of deductions and credits, and wondering all the while whether other
99
means of saving tax might have been missed through ignorance of the laws."
Simplicity, according to this description, occurs when the government reforms
or designs the tax law by "eliminat[ing] and avoid[ing] provisions that would
00
unduly complicate tax administration and compliance for most taxpayers."
Simplicity is, thus, the antithesis of complexity, or, as Sunstein has posited,
"simplicity is friendly, and complexity is not."''
Simplexity is distinct from simplicity in that simplexity refers to a concept
that appears to be simple, but that nonetheless retains underlying complexity.
As neurophysiologist Alain Berthoz has written, "[s]implexity is not
simplicity. It is fundamentally linked with complexity, with which it shares
94 Simplexity, COLLINS DICTIONARY, http://www.collinsdictionary.com/submission/1290/Simplexity
(last
updated July 20, 2012).
95 Simplexity, URBAN DICTIONARY, http://www.urbandictionayy.com/define.phpterm-Simplexity
(last
updated Nov. 19, 2006).
96 Simplicity, MERLAM-WEBSTER, http://www merriam-webstercorm/dictionary/simplicity
Sept. 29, 2016).
97 SUNSTEIN, supra note 13, at 2.
98 Id.
99 See OFFICE OF THE SECY, supra note 18, at 15 16.
i00 Id. at 16.
101 SUNSTEIN, supra note 13, at 1.
(last visited
206
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common roots."'0 2 A few examples illustrate the appearance of simplexity
outside of law. Scientists have used the term to describe the appearance of
phenomena whose simplicity obscures underlying complexity, such as a
seemingly simple houseplant, whose simple green leaves obscure its
underlying "microhydraulics and fine-tuned metabolism and dense schematic
of nucleic acids."' 1 3 Similarly, psychology researchers have referred to
simplexity as a "cognitive process that compresses information and synthesizes
it without losing its complexity.' 1 4 Commentators have noted that certain
literary forms, such as metaphors and fables, are simplex as their accessible
narrative conceals deeper, underlying meaning. 10 5 For instance, Berthoz has
argued that simplexity occurs in characters such as the seven dwarves, for
"Dopey is not as dopey as he seems" because he is "not a village idiot but a
witness and wise presence ....
"106 In another artistic setting, simplexity has
become a foundational principle of Pixar Animation Studios, producer of
acclaimed computer-animated feature films. 107 As one of its lead animators has
stated, the studio's artists strive to achieve simplexity by "simplifying an
image down to its essence,"' 10 8 which causes complexity
of texture, design and
10 9
detail to be "masked by how simple the form is."'
We now offer our definitions of terms that we apply throughout the
remainder of this Article. While tax scholars frequently discuss
"simplification" as a normative goal of tax design and reform, 110 we define
simplification as resulting in two distinct possibilities, "simplicity" and
"simplexity." We define "simplicity" as occurring when policymakers reform
the law by eliminating specific complex provisions or procedures through
enactment of statutory changes or issuance of regulations. For instance, we
would consider a tax system that repeals specific complex deductions or
statutory exceptions or that exempts millions of low-income taxpayers from
filing tax returns at all as one that exhibits simplicity. In contrast, we define
102 BERTHOZ, supra note 22, at x.
103 KLUGER, supra note 20, at 11.
104 Gelalian, supra note 21, at 185.
105 See, e.g., BERTHOZ, supra note 22, at 208 ("Metaphor... is a wonderful way of shortcutting
language.").
106 Id
107 See HAUSER, supra note 23, at 18.
108 Id (quoting Pixar animator Ricky Nierva).
109 Id
ii0 See Boris I.
Bittker, Tax Reform and Tax Simplification, 29 U. MIAMI L.REv. 1 (1974); Joel Slemrod,
The Return to Tax Simplification: An EconometricAnalysis, 17 PUB. FIN. REV. 3, 3 (1989); supra note 99 and
accompanying text.
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SIMPLEXITY
"simplexity" as resulting when the government offers clear and simple
explanations of the law without highlighting its underlying complexity or
reducing this complexity through formal legal changes. We refer to such
explanations and descriptions as "IRS simplifications."
B. Categoriesand Examples
Simplexity pervades IRS publications. The IRS frequently attempts to
describe the tax law in simplified terms in IRS publications, which are
intended for both the general public and tax professionals, after considering
likely effects on taxpayers and the IRS itself As this subpart shows, IRS
simplifications can be grouped into three categories, based on descriptions that:
(1) present contested tax law as clear tax rules, (2) add administrative gloss to
the tax law, and (3) fail to fully explain the tax law, including possible
exceptions.
1. PresentingContestedTax Law as Clear Tax Rules
As tax lawyers, accountants, and law students are well aware, the judiciary
plays an important role in interpreting the tax law."' The judiciary's
involvement in interpreting the tax law often underscores, and, at times, even
increases the ambiguity regarding the tax law's meaning. The examples below
illustrate how the IRS often presents tax positions that are the subject of
judicial ambiguity as if they are unambiguous tax rules.
a. Deductibility of Ordinaryand Necessary Business Expenses
A classic example of an ambiguous tax law provision is the deduction for
"ordinary and necessary" trade or business expenses incurred during the
taxable year. " 2 In order to determine whether a taxpayer can deduct expenses
as trade or business expenses, the taxpayer must determine that such expenses
are both "ordinary" and "necessary."" ' Explaining what, exactly, these terms
mean is a famously difficult task. For example, in attempting to articulate the
standard for deductibility of business expenses, Justice Cardozo stated that
111 See Leandra Lederman, What Do Courts Have to Do With It?: The Judiciary'sRole in Making Federal
Tax Law, 65 NAT'L TAX J. 899, 899 (2012).
112 I.R.C. § 162(a) (2012); Treas. Reg. § 1.162-1(a) (2016).
113 Deputy v. Du Pont, 308 U.S. 488, 497 (1940); Welch v. Helvering, 290 U.S. 111, 113 (1933).
EMORY LAW JOURNAL
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[Vol. 66:189
"[o]ne struggles in vain for any verbal formula that will supply a ready
touchstone."114
IRS Simplification. Despite this inherent legal ambiguity, the IRS uses an
IRS publication as a vehicle for providing a ready, albeit overly clear,
touchstone to taxpayers. The IRS presents taxpayers with a straightforward
summary of the test for deductibility of business expenses in IRS
Publication 535 (Business Expenses)."l 5 In this publication, the IRS states that
"a business expense must be both ordinary and necessary" to be deductible."16
With respect to the "ordinary" prong, Publication 535 instructs taxpayers that
"[a]n ordinary expense is one that is common and accepted in your
industry." ' This definition imposes on taxpayers the obligation to determine
whether other taxpayers operating similar businesses-the taxpayer's
"industry"-incur the expense at issue in their business practices (i.e., whether
the expense is "common and accepted")." 8
Tax Law. In contrast to the clear rule expressed in the IRS publication,
courts have exhibited differing approaches to what satisfies the "ordinary"
requirement. Several courts have adopted the view expressed in IRS
Publication 535 by asking whether other similarly-situated taxpayers have
incurred the business expense at issue. "' Yet other courts have stated
explicitly that taxpayers may treat business expenses as ordinary even if few or
no other similarly-situated taxpayer in the relevant industry incurs this
expense.120 As one court held, a taxpayer "should not be penalized taxwise for
his business ingenuity in [incurring business expenses] which do not conform
121
to the practices of one whom he is naturally trying to surpass in profits."'
Some courts have similarly looked askance, finding that the percentage of
taxpayers in an industry that has incurred a specific expense is irrelevant to
whether an expense is ordinary.' 22 And in internal memoranda, even IRS
114
Welch, 290 U.S. at 115.
115
INTERNAL REVENUE SERV., supra note
3, at 3.
116 Id.
117 Id.
118 Id.
119 See, e.g., Reffett v. Comm'r, 39 T.C. 869, 878 89 (1963) (considering whether other coal operators
paid same contingent witness fees as taxpayer).
120 See, e.g., United Title Ins. v.Comm'r, 55 T.C.M. (CCH) 34, 45 (1988) (holding that even if taxpayer
were only one to incur certain expenses, "that in itself would not mean the expenses were not ordinary within
the meaning of section 162(a)").
121 Poletti v.Comm'r, 330 F.2d 818, 822 (8th Cir. 1964).
122 Brizell v.Comm'r, 93 T.C. 151, 158 59 (1989) ("We reject the suggestion that a given percentage of
an industry must pay or incur a certain expense in order for the expense to be ordinary.").
2017]
SIMPLEXITY
209
officials have concluded that expenses may satisfy the ordinary prong despite
the fact that they are not common practice because "[t]hat which today
is a
123
novel method of generating business may be commonplace tomorrow."
In even starker conflict with the IRS's characterization of the "ordinary"
prong in Publication 535, some courts have held that the "ordinary" prong is
simply meant to clarify that, even though an expense may be necessary, it may
not be deductible in the year in question because the expense may relate to the
production of income in future tax years.124 For instance, in one decision, the
Supreme Court found that the "principal function of the term 'ordinary' in
§ 162(a) is to clarify the distinction, often difficult, between those expenses
that are currently deductible and those that are in the nature of capital
expenditures
"....
125 Citing this language, other courts have refrained from
considering whether an expense is "common and accepted" in the taxpayer's
26
industry. 1
Taxpayer Effects. Despite the differing judicial interpretations of the term
ordinary under § 162(a) of the Code, Publication 535 presents the taxpayer
with an unequivocal definition of an ordinary expense as one that is common
and accepted in the taxpayer's industry.127 Taxpayers who apply the clear rule
stated in IRS Publication 535 may reasonably conclude they are not entitled to
claim business expense deductions, even if they would have been entitled to do
so under one of the alternative judicial interpretations. For example, assume a
baker pays legal fees to retain an attorney to defend the baker against claims of
food poisoning by customers. Under IRS Publication 535, if the baker cannot
identify other owners of bakeries who have paid similar legal fees, the baker
should conclude that this expense does not satisfy the ordinary standard and,
consequently, should forego a business expense deduction. 28 A more
comprehensive understanding of potentially applicable case law may have
encouraged the baker to claim the deduction. 29 The forgone deduction would
most likely increase the tax liability of the baker.
123
124
125
126
127
128
129
I.R.S.
Field Service Advisory, 1996 WL 33320948 (Sept. 18, 1996).
See, e.g., Comm'rv. Tellier, 383 U.S. 687, 689 70 (1966).
Id. at 689.
See, e.g., Raymond Bertolini Trucking Co. v.Comm'r, 736 F.2d 1120 (6th Cir. 1984).
See INTERNAL REVENUE SERV., supra note 3, at 3.
Id.
See supra notes 120 23 and accompanying text.
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b. Deductibility ofHome MortgageRefinancing Points
The IRS publication regarding the deductibility of home mortgage
"refinancing points" provides another example of an IRS simplification that
presents contested tax law as a clear tax rule. 130 Homeowners with mortgages
may pay "points" to their lenders in order to reduce their mortgage interest
rate. 131 When these homeowners pay points, they may wonder whether they
can deduct them in the year of payment. After all, such points essentially
represent prepaid interest, and home mortgage interest is tax deductible,
subject to various limitations. Further, the Code explicitly allows taxpayers to
claim a tax deduction for "points paid in respect of any indebtedness incurred
in connection with the purchase or improvement of, and secured by, the
principal residence of the taxpayer .... "132 Yet the statutory language does not
offer the taxpayer guidance regarding the deductibility of points that are
incurred purely to refinance an existing mortgage rather than to purchase a new
home or improve an existing one. 133
IRS Simplification. To fill this statutory void, the IRS provides clear
guidance to taxpayers regarding whether and when refinancing points are
deductible. In IRS Publication 936 (Home Mortgage Interest Deduction), the
IRS states:
Generally, points you pay to refinance a mortgage are not deductible
in full in the year you pay them. This is true even if the new
mortgage is secured by your main home.
However, if you use part of the refinanced mortgage proceeds to
improve your main home and you meet the first 6 tests listed under
Deduction Allowed in Year Paid,you can fully deduct the part of the
points related to 34the improvement in the year you paid them with
your own funds. 1
In other words, the IRS advises taxpayers that they are not entitled to claim
current-year tax deductions for refinancing points, unless the taxpayer uses
proceeds from the refinancing to improve the home. Rather than deduct
130
INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. No. 936, HOME MORTGAGE INTEREST
DEDUCTION 7 (2015).
131 Id. at 5 ("The term 'points' is used to describe certain charges paid, or treated as paid, by a borrower to
obtain a home mortgage."). For an example of refinancing points, see Buying Points to Lower Your Refinance
Rate, BANK OF AMERICA, https://www.bankofamerica.com/home-loans/refinance/understanding-your-newpayment/buying-points-lower-interest-mte.go (last visited Aug. 13, 2016).
132 I.R.C. § 461(g)(2) (2012).
133
Id.
134 INTERNAL REVENUE SERV., supra note 130, at 7.
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SIMPLEXITY
refinancing points, the IRS states that taxpayers must amortize them over the
35
life of the loan. 1
Tax Law. While the IRS presents the tax law as an unambiguous rule, the
case law regarding this issue is not as clear. The description in IRS
Publication 936 is the IRS's own position. 136 However, the IRS's view is not
necessarily correct. For instance, in Huntsman v. Commissioner, the Eighth
Circuit Court of Appeals held that refinancing points were immediately
deductible in a situation in which the refinancing was an integrated step in
obtaining permanent financing. 137 The IRS expressed its disagreement with
this conclusion and its intention not to follow the Eight Circuit's decision
outside the Eighth Circuit. 138
The IRS does not signal the existence of this contrary court authority to the
taxpayer in IRS Publication 936, instead simply setting forth the IRS's own
position as the rule. The IRS does preface its description of the rule with the
word "generally."' 139 However, the word "generally" does not provide any
indication of the controversy surrounding the IRS's position, or the IRS's
defeat in pressing the issue in court. 140 Rather, the word "generally" seems to
introduce the unrelated set of exceptions in the following sentence. 14 1 Even if
the word "generally" is meant to signal some sort of exception to the general
rule that the IRS sets forth in the first sentence, it is an oblique reference at
best. To anything but the most trained eye, this IRS simplification presents the
IRS's contested view as the rule.
Taxpayer Effects. For taxpayers who are questioning whether to deduct
refinancing points, the relevant IRS publication provides straightforward
guidance: such points are not deductible in the year paid unless the refinancing
proceeds are used to improve the home. Taxpayers, therefore, may forego
current deductions, even though some courts may respect such deductions
under certain conditions. Alternatively, a taxpayer may choose to spend the
proceeds of a home mortgage refinancing on home improvement expenses in
135
136
137
138
139
140
Id.
See Rev. Rul. 87-22, 1987-1 C.B. 146 (setting forth the IRS's position).
905 F.2d 1182, 1185 86 (8th Cir. 1990).
Hunstmanv. Comm'r,905 F.2d 1182 (8th Cir. 1990), action on dec., 1991-02 (Feb. 11, 1991).
INTERNAL REVENUE SERV., supra note 130, at 7.
See Huntsman v. Comm'r, 91 T.C. 917 (1988), rev'd, 905 F.2d 1182 (8th Cir. 1990). For further
discussion, see James E. Tierney, Pointing the Way Through Section 461(g): The Deductibility ofPoints Paid
in Connection with the Acquisition or Improvement of a PrincipalResidence, 71 NEB. L. REV. 1095 (1992).
141 INTERNAL REVENUE SERV., supra note 130, at 7.
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[Vol. 66:189
order to ensure immediate deductibility of the refinancing points. If the
taxpayer would not otherwise pursue the home improvement, the IRS
publication would distort the taxpayer's behavior, resulting in inefficiency.
Taxpayers who forego immediate deductions of the home mortgage
refinancing points may still deduct the refinancing points over the term of the
loan. 142 But, for many taxpayers, immediate, full deductibility is more
beneficial than prolonged, partial deductibility over a period of years.143 As a
result, this IRS simplification may have adverse tax consequences for many
taxpayers.
c.
Tax Characterizationof Leveraged Leases
The IRS's description of "leveraged leases" provides a final example of an
IRS simplification that turns contested tax law into a clear rule.144 Leveraged
leases are a common form of financing business assets that typically involves
three actors: a lessee (an operating business such as a manufacturer or airline),
a lessor (such as an investment fund), and a creditor (a bank). 145 The lessor
purchases business assets using heavy debt financing from the creditor. The
lessor then leases the business assets to the lessee. The motivation for the
lessor to purchase the business assets is that the lessor will claim tax
deductions for depreciation of the business assets. The central legal question
raised by this transaction is whether the lessor is properly characterized as the
owner of the leased business assets for tax purposes, which would entitle it to
the depreciation tax deductions. 146
IRS Simplification. To address this question, in IRS Publication 535
(Business Expenses), the IRS warns taxpayers that "[l]everaged lease
transactions may not be considered leases."' 147 As a result, it suggests that
142 See supra note 135 and accompanying text.
143 See William D. Andrews, A Consumption-Type or Cash Flow PersonalIncome Tax, 87 HARV.L.REV.
1113, 1152 (1974); Daniel I.Halperin, Interest in Disguise: Taxing the "Time Value of Money", 95 YALE LJ.
506 (1986); Alvin C.Warren, Jr., The Timing of Taxes, 39 NAT'L TAX J.499 (1986).
144 INTERNAL REVENUE SERV., supra note 3, at 9.
145 See James C.Ahlstrom, Iris C.Engelson & Victor Sirelson, The Economics ofLeveraged Leasing, in 1
EQUIPMENT LEASING LEVERAGED LEASING 6-2 (Ian Shmnk & Arnold G. Gough, Jr., eds., 4th ed. 2008).
146 For examples of judicial controversy over whether a lease should be respected, see Frank Lyon Co.v.
United States, 435 U.S. 561 (1978); BB&T Corp. v.United States, 523 F.3d 461 (4th Cir. 2008); Transamerica
Corp. v. United States, 7 Cl. Ct 441 (1985). For further discussion, see Charles I.Kingson, The Continued
Confusion over Tax Ownership, 93 TAx NOTES 409 (2001); Alex Raskolnikov, ContextualAnalysis of Tax
Ownership, 85 B.U.L.REV. 431 (2005); Bernard Wolfman, The Supreme Court in Lyon's Den: A Failureof
JudicialProcess, 66 CORNELL L.REV. 1075 (1981) (criticizing FrankLyon Co.).
147 INTERNAL REVENUE SERV., supra note 3, at 9.
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SIMPLEXITY
taxpayers should consider seeking a private letter ruling from the IRS
addressing the tax treatment of the leveraged lease.' 48 The IRS states that
taxpayers must meet several requirements to secure a ruling that the transaction
is, in fact, a lease: (1) "[t]he lessor must maintain a minimum unconditional 'at
risk' equity investment in the property," which the IRS defines as at least 20%
of the property's cost, (2) "[t]he lessee may not have a contractual right to buy
the property from the lessor" at a discounted price, (3) "[t]he lessee may not
invest in the property, except as provided" in other IRS guidance, (4) "[t]he
lessee may not lend any money to the lessor to buy the property," and (5)
"[t]he lessor must show that it expects 49
to receive" an economic profit, absent
tax consequences, from the transaction. 1
Tax Law. While the IRS publication presents taxpayers with clear
guidelines, the issue of whether a lease should be respected for tax purposes is
highly contestable and fact-specific. In several cases, courts have rejected the
IRS's argument that the taxpayer failed to enter into a true lease merely
because the taxpayer did not meet the guidelines described in IRS
Publication 535. For instance, in Estate of Thomas v. Commissioner, the Tax
50
Court rejected the IRS's application of the 20% equity investment guideline. 1
In another decision, the Tax Court stated explicitly that it was not "obligated to
adhere" to the IRS's guidelines. "5' Other judicial decisions have disregarded
the IRS's guideline that lessees may not lend money to the lessor without
threatening the lessor's ability to claim ownership of property. 152 Indeed,
summarizing courts' reactions to the guidelines, one commentator has stated,
courts "have not accorded [them] much significance either as a body of logic
153
or as a viable summary of legal precedents."'
Taxpayer Effects. One could argue that IRS Publication 535 merely
catalogues what the IRS requires in order to offer taxpayers a private letter
ruling that the IRS will, in fact, treat a transaction as a lease. But by describing
its own guidelines in Publication 535 without mentioning any of the judicial
doubt about such guidelines, IRS Publication 535 creates a belt-and-suspenders
id.
id.
150 84 T.C. 412,440 & n.51 (1985).
151 Boyce v. Comm'r, T.C. Summ. Op. 2010-100, at 4 (2010).
152 See, e.g., Lansburgh v. Comm'r, 54 T.C.M. 691, 697 (1987) (respecting lease where lessee provided
148
149
loan to lessor); L.W. Hardy Co. v. Comm'r, 52 T.C.M. (CCH) 1540, 1552 (1987) (respecting lease where
lessee provided loan to lessor); see also I.R.S. Tech. Adv. Mem 8046013 (Aug. 8, 1980) (respecting lease
where lessee agreed to reimburse lessor under certain circumstances).
153 Toby Cozart, Equipment Leasing: Substance andForm, TAX MGMT. PORTFOLIO (BNA) 544 (2009).
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type of advantage for the IRS's own view of the law. Specifically, the IRS uses
Publication 535 to highlight its own guidelines as a distillation of the relevant
factors that taxpayers should consider, despite conflicting case law. While
some savvy taxpayers may go on to research judicial alternatives, many others
may simply accept the IRS's view. This IRS simplification, thus, can shape
some taxpayers' and advisors' perceptions of the tax law in ways that are
consistent with the IRS's views.
2. Adding Administrative Gloss to the Tax Law
Another example of simplexity occurs when the IRS adds its own
administrative gloss to the tax law as it describes the applicable tax law. As the
examples below demonstrate, these additions of administrative gloss can result
in representations of the tax law that deviate from relevant provisions of the
Code, Treasury regulations, and case law.
a. CapitalizationofImprovements
The IRS's description of the rules regarding capitalization of improvements
is an illustration of the IRS's propensity to add administrative gloss to the tax
law. 5 4 If a taxpayer incurs an expense "for new buildings or for permanent
improvements or betterments made to increase the value of any property or
estate," current law provides that the taxpayer may not deduct this expense
currently, but instead must capitalize the expense and claim depreciation tax
deductions, which reflect the decline in value of this capitalized expense each
year, in accordance with a fixed schedule.155 On the other hand, if the taxpayer
incurs an expense merely to maintain or repair property, the taxpayer may be
entitled to claim a full deduction immediately. 5 6 While the relevant statute
directly addresses certain expenditures, such as costs incurred to construct a
new building, it does not directly address the deductibility of most business
expenses. 157
IRS Simplification. In its publication regarding capitalization, the IRS
provides a general standard and several specific examples to assist taxpayers.
The IRS states in Publication 535 (Business Expenses) that improvements,
154
INTERNAL REVENUE SERV., supra note
3, at 3.
155 I.R.C. § 263(a) (2012); see also I.R.C. §§ 167, 168 (2012) (depreciation).
156 Treas. Reg. § 1.162-4(a) (2014) (allowing the taxpayer to deduct amounts paid for "repairs and
maintenance to tangible property").
157 I.R.C. § 263(a) (referring only to items for which "no deduction shall be allowed").
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215
which must be capitalized, are "generally major expenditures."'5 8 After
providing this general standard, the IRS then says that "[s]ome examples are
new electric wiring, a new roof, a new floor, new plumbing, bricking up
5i 9
windows to strengthen a wall, and lighting improvements.'
Tax Law. This example represents an addition of administrative gloss
because the "major expenditure" standard does not appear in the tax law itself
Whether a taxpayer's purchase or investment represents an improvement has
historically been the subject of significant judicial controversy, with little
uniformity in the decisions.160 In 2013, in order to "reduce the controversy in
this area," the Treasury issued final regulations that directly address whether a
taxpayer's purchase of services or property is an improvement. 161 Rather than
setting forth a general standard for identifying an improvement, the regulations
state that one must consider "all of a taxpayer's particular facts and
circumstances.' 162 Specifically, the regulations provide that in order to
determine whether an expense is necessitated by normal wear and tear, which
is deductible, or a permanent improvement, which is subject to capitalization,
the taxpayer should consider the condition of the property at issue immediately
prior to and after its repair. 163 The regulations focus on whether the
expenditure enables the taxpayer to keep its asset in normal operating
condition, but do not apply the "major expenditure" standard of IRS
Publication 535. 164
In addition, the examples that the IRS provides in Publication 535 elide the
complexity of the underlying law. For instance, IRS Publication 535 describes
"new electric wiring" as an example of the general standard that
"[i]mprovements are generally major expenditures."' l65 This example is cunious
158 INTERNAL REVENUE SERV., supra note 3, at 3.
159 Id.
160 See, e.g., Moss v.Comm'r, 831 F.2d 833 (9th Cir. 1987) (allowing business deduction for expenses
incurred in conjunction with improvement plan); Cinergy Corp. v.United States, 55 Fed. Cl. 489 (2003)
(allowing business deduction for encapsulation and removal of asbestos); Norwest Corp. v.Comm'r, 108 T.C.
265 (1997) (disallowing business deduction for asbestos removal); Oberman Mfg. Co.v.Comm'r, 47 T.C. 471
(1967) (allowing business deduction for roof removal, replacement, and expansion). As the Treasury has
acknowledged, this area has "resulted in considerable controversy between taxpayers and the IRS over many
years." T.D. 9636, 2013-43 I.R.B. 331,332.
16i T.D. 9636, 2013-43 I.R.B. 331, 332.
162 Id.
163Treas. Reg. § 1.263(a)-30)(2)(iv) (2016).
164A review of the final § 263 regulations does not show use of the term "major expenditure." We
confirmed our reading of the regulations with a Westlaw search for the terms: "major expenditure" or "major
expenditures" w/20 improvement.
165 INTERNAL REVENUE SERV., supra note 3, at 3.
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because there is a specific example in the regulations, which provides that
replacement of as much as 30% of a building's electrical wiring does not
represent a non-deductible restoration. 166 As another illustration, while IRS
Publication 535 broadly states that "new plumbing" is an example of the
general standard that "[i]mprovements are generally major expenditures, '167 a
specific example in the regulations describes how a taxpayer's replacement of
68
eight out of twenty sinks in bathrooms does not constitute an improvement. 1
Indeed, several of the specific examples of business expenses that IRS
Publication 535 describes as improvements that must be capitalized are also
presented in specific examples in the applicable regulations as repairs that may
69
be deducted immediately. 1
Taxpayer Effects. By adding administrative gloss to the tax law in its
taxpayer publication regarding capitalization, the IRS may lead taxpayers to
claim tax positions that are different from the treatment required by current
law.
Returning to the example at the beginning of this Article, assume a chef,
who owns his own restaurant, normally incurs a $10,000 annual expense to
repair copper piping in his restaurant. In one year, the chef incurs a $20,000
expense to repair the pipes as a result of a global shortage of copper. Applying
the IRS's standard in IRS Publication 535, the chef may reasonably conclude
that as a result of its magnitude, the $20,000 expense should be treated as a
"major expenditure," which therefore is not deductible. However, applying the
Treasury regulations' actual before-and-after approach, if the expense simply
enables the chef to repair normal wear and tear to his business assets, the chef
should be entitled to deduct the $20,000 expense, even if it is substantially
70
higher than the expense to repair the pipes in prior years. 1
Alternatively, assume the chef pays $5000 to completely replace a brick
oven in his restaurant, a small amount compared to all of his annual business
expenses of $200,000. Applying the "major expenditure" standard, it is
possible that the chef would claim a deduction for this amount currently, as the
amount only represents 2.5% of his annual business expenses. 171 A review of
the Treasury regulations, however, shows that this expense does not represent
166
167
168
169
170
171
Treas. Reg. § 1.263(a)-3(k)(7) ex. 21 (2016).
INTERNAL REVENUE SERV., supra note 3, at 3.
Treas. Reg. § 1.263(a)-3(k)(7) ex. 23.
See, e.g., Treas. Reg. § 1.263(a)-3(k)(7) ex. 21 (wiing), ex. 23 (plumbing).
Treas. Reg. § 1.263(a)-30)(2)(iv) (2016).
INTERNAL REVENUE SERV., supra note 3, at 3.
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mere maintenance, and instead, should be capitalized rather than deducted
currently. 172
As these scenarios show, the administrative gloss regarding capitalization
in IRS Publication 535 can cause taxpayers to forego business expense
deductions that may be allowable under the relevant regulations or,
alternatively, to claim tax deductions for expenses that must be capitalized
under the relevant regulations. In either case, applying the IRS's simplification
may cause taxpayers to deviate from the applicable tax law.
b. Exclusion of Gainfrom Sale ofPrincipalResidence
The IRS's guidance to taxpayers regarding the exclusion from taxable
income of gain from the sale of a principal residence is another example of the
IRS's addition of administrative gloss to the text of a statute or Treasury
regulation. 173 Under current law, individual taxpayers can exclude a portion of
their realized gains upon selling their principal residence (up to $250,000 for
single individuals and $500,000 for married couples), if they meet certain
requirements. 174 Namely, taxpayers must have owned and occupied the
residence as their principal residence for at least two years during the five-year
period immediately prior to the sale. 175 If taxpayers cannot meet this ownership
and occupancy requirement, however, they can still receive partial gain
exclusion if they can show that the reason for the sale is due to a "change in
176
place of employment, health, or ...[such other] unforeseen circumstances."'
Based on this statutory language alone, taxpayers may have difficulty
determining whether their reason for selling their home qualifies as any of the
prescribed circumstances.
IRS Simplification. To assist taxpayers in making the determination of
whether their sale is due to a "change in place of employment, health, or...
[such other] unforeseen circumstances," the IRS points to important factors
that can help taxpayers make the determination. 177 In IRS Publication 523
(Selling Your Home), for example, the IRS states that a sale may meet the
statutory standard if the taxpayer faced "significant financial difficulty
172 See Treas. Reg. § 1.263(a)-3(d) (2016) (requirement to capitalize improvements).
173 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. NO. 523, SELLING YOUR HOME 5 (2015).
174 I.R.C. §§ 121(a), (b) (2012).
171 I.R.C. § 121(a).
176 I.R.C. § 121(c)(2)(B).
177 INTERNAL REVENUE SERV., supra note 173, at 4 5.
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[Vol. 66:189
maintaining the home."' 7 8 As another important factor, the IRS describes that
the sale may meet the statutory standard if the home "became significantly less
suitable as a main home for [the taxpayer and the taxpayer's] family for a
specific reason."' 179 The IRS's repeated use of the term "significant" in
describing the important factors provides taxpayers with a mental shortcut for
determining whether their reasons for selling their home meet the statutory
standard of a sale due to a "change in180place of employment, health, or...
[such other] unforeseen circumstances.'
Tax Law. In creating this mental shortcut, however, the IRS has made a
subtle, but potentially noteworthy, change to the relevant tax law. While IRS
Publication 523 refers to "significant financial difficulty" and a "significantly
less suitable" main home, the applicable Treasury regulations instead use the
term "material" to describe these events.' 8 ' For instance, in the Treasury
regulations that form the basis of the IRS's statements in IRS Publication 523,
the Treasury provides that a taxpayer may claim the partial gain exclusion if
the "taxpayer's financial ability to maintain the property is materially
impaired."' 18 2 Likewise, these regulations offer taxpayers the ability to claim
the exclusion if the "suitability of the property as the taxpayer's principal
residence materially changes."' 1 3 By substituting the word "significantly" in
the taxpayer publication for the word "materially," the IRS has added its own
gloss to factors that otherwise appear almost verbatim in the Treasury
regulations.
Taxpayer Effects. The IRS's substitution of the word "significantly" for the
word "materially" could have different effects on taxpayers' decisions.
Whether the substitution causes taxpayers to be more likely to forego or claim
the principal residence gain exclusion likely depends on the taxpayer's
sophistication with the tax law and whether the taxpayer is relying on a tax
advisor.
For some taxpayers, especially those who do not have a sophisticated legal
background, the change of terms may discourage them from claiming the
principal residence gain exclusion. For example, a basic dictionary definition
178 Id. at 5 (emphasis added).
179 Id. (emphasis added).
180 I.R.C. § 121(c)(2)(B).
181 Treas. Reg. § 1.121-3(b) (2016).
182 Treas. Reg. § 1.121-3(b)(3) (emphasis added).
183 Treas. Reg. § 1.121-3(b)(2) (emphasis added).
SIMPLEXITY
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219
of "material" includes terms such as "relevant,"184 while the definition of
"significant" includes terms such as "momentous." 85 It is possible that a
taxpayer may perceive that a higher standard must be met in order to claim the
principal residence gain exclusion than if the IRS had adopted the Treasury
regulations' "materially" language. The IRS publication may discourage such a
taxpayer from claiming exclusions that the taxpayer may have taken based on
the regulations.
On the other hand, taxpayers with a sophisticated legal background (or who
have tax advisors) could conclude that the word "significantly" in the taxpayer
publication creates a lower standard than the word "materially." When
addressing corporations' internal financial reporting controls, the U.S.
Securities & Exchange Commission has defined "significant deficiencies" as
lesser problems than "material weaknesses. " 186 Similarly, in merger
agreements, parties can exit signed deals if they discover a material, as
opposed to a significant, adverse change, signifying again that, for corporate
law purposes, material is a higher standard than significant. 87 Using this
knowledge, taxpayers with a sophisticated legal background (or their advisors)
may assume a lower standard is required by the taxpayer publication, relative
to the standard set forth in regulations.
As this example illustrates, by substituting its own administrative gloss for
the text in the applicable statute or regulations, the IRS may influence
taxpayers' views of the law in ways that may not be consistent with the actual
tax law. Whether this causes taxpayers to be more or less likely to claim a tax
benefit, the outcome may be different from that which Congress or the
Treasury intended.
c. Multiple IndividualRetirementAccount Rollovers
When adding administrative gloss to the tax law in taxpayer publications,
the IRS can also make changes that unambiguously benefit taxpayers, as
revealed by a publication regarding individual retirement account (IRA)
rollovers. Under current law, holders of IRAs, which are tax-favored savings
184 Material, MERRIAM-WEBSTER
DICTIONARY,
http://www.meriam-webster.com/dictionayy/material
(last visited Oct. 28, 2016).
185
Significant,WEBSTER' S NEW WORLD COLLEGE DICTIONARY (5th ed. 2014).
186
17 C.F.R. § 240.12b-2 (2016); Definition of the Term Significant Deficiency, Release No.33-8829, 72
Fed. Reg. 44924 (Aug. 9, 2007).
187 See Andrew A. Schwartz, A "StandardClause Analysis" of the FrustrationDoctrine and the Material
Adverse Change Clause, 57 UCLAL. REV.789, 829 30 (2010).
[Vol. 66:189
EMORY LAW JOURNAL
220
accounts, can withdraw amounts from these accounts before reaching age
59 1/2 without triggering tax liability and a 10% early withdrawal tax penalty
as long as the taxpayer deposits the withdrawn amounts directly into another
IRA within sixty days (an "IRA rollover").' 8 8 While the statute clearly states
that a taxpayer may complete this rollover process only once each year with
respect to a particular IRA, it does not address whether a taxpayer who holds
more than one IRA may complete multiple tax-free rollovers using multiple
IRAs each year. 18 9
IRS Simplification. Starting in 1984, the IRS addressed this ambiguity by
adding its own administrative gloss to the statutory language. 190 For thirty
years in IRS Publication 590 (Individual Retirement Arrangements (IRAs)),
the IRS stated that multiple IRA rollovers in a single tax year were permissible
without resulting in tax or an early withdrawal tax penalty, even though this
language did not appear in the statute itself.191 In stating this rule, the IRS
parroted language from a proposed, but never finalized, Treasury regulation
issued in 1981.192
Tax Law. The Tax Court ultimately disagreed with the rule the IRS had set
forth in Publication 590. In Bobrow v. Commissioner,193 a prominent New
York City tax lawyer, Alvan Bobrow, applied the tax treatment suggested by
the IRS in IRS Publication 590.194 Bobrow and his wife made multiple IRA
rollovers in 2008.19 Following the IRS's description of the tax law at the time,
the taxpayers treated these transactions as tax-free rollovers.1 96 The Tax Court
rejected the taxpayers' tax treatment, ruling that the "plain language" of the
relevant statute only permits taxpayers to participate in a single tax-free IRA
rollover each year. 197
Following Bobrow, the IRS revised the taxpayer publication to match the
Tax Court's interpretation.' 98 However, the IRS also announced that it would
188 I.R.C. § 408(d)(3) (2012).
189 I.R.C. § 408(d)(3)(B).
190
See, e.g., INTERNAL
REVENUE SERV.,
DEP'T OF THE TREASURY,
PUB. NO.
RETIREMENT ARRANGEMENTS (IRAs) 25 26 (2014).
191
192
193
194
195
196
197
Id. at25.
Prop. Treas. Reg. § 1.408-4(b)(4)(ii), 46 Fed. Reg. 36,206 (July 14, 1981).
No. 7022-11, T. C.M. 2014-21 (2014).
Id. at3 5.
Id. at4 5.
Id. at 5.
Id. at 12 13.
198 I.R.S. Announcement 2014-15, 2014-16 I.R.B. 973, 973.
590, INDIVIDUAL
SIMPLEXITY
2017]
"not apply the Bobrow interpretation ...to any rollover that involves an IRA
distribution occurring before January 1, 2015."' 19 Consequently, the IRS will
not challenge taxpayers who participated in multiple IRA rollovers in a single
tax year prior to Publication 590's revision in 2015.200
Taxpayer Effects. This example demonstrates how, at times, the IRS's
administrative gloss in taxpayer publications may be taxpayer favorable.
Without question, the administrative gloss in IRS Publication 590 was
advantageous to taxpayers, relative to the reading of the statute ultimately
adopted by the Bobrow court. Moreover, as Bobrow exemplifies, taxpayerfavorable administrative gloss in IRS publications can even influence the tax
planning and reporting decisions of sophisticated taxpayers, such as corporate
tax lawyers. 20 ' This example also shows that when the IRS issues a taxpayerfavorable proposed Treasury regulation, it may restate this regulation in an IRS
publication. 20 2 For most individuals, the restatement appears as though it is
current law, because the IRS publication provides
no indication that its source
20 3
is merely a proposed Treasury regulation.
3. Failingto Fully Explain the Tax Law
A final category of simplexity consists of descriptions of the tax law in IRS
publications that omit discussion of relevant exceptions or that otherwise fail to
fully explain the tax law. Several examples of these types of statements are
described below.
a. BarteringDeductions
One example of an IRS description that fails to fully explain the tax law
can be found in the context of bartering transactions. A bartering transaction
involves paying for a good or service with another good or service. For
instance, if a dentist requires the services of an electrician in order to maintain
equipment in her office, she may pay for the electrician's services by providing
199 Id.at 974.
200 Id; see also IRA One-Rollover-Per-Year Rule, INTERNAL REVENUE SERV., http://www.irs.gov/
Retirement-Plans/IRA-One-Rollover-Per-Year-Rule (last updated Jan. 22, 2016).
201 Bohbrow, T.C.M.2014-21, at 3 (explaining the taxpayer is "an attorney specializing in tax law').
202 INTERNAL REVENUE SERV., supra note 190, at 25 26; see also Janet Novack, Gotcha! Tax Court
PenalizesIRA Rollover that IRS PublicationSays Is Allowed, FORBES (Mar. 25, 2014, 11:47 AM), http://www.
forbes.com/sites/j anetnovack/2014/03/25/gotcha-tax-court-penalizes-im-rollover-that-irs-publication-says-isallowed/#1b2deefc22a3 (noting restatement of text in Prop. Treas. Reg. § 1.408-4(b)(4)(ii) in IRS
Publication 590 prior
to 2014).
203
INTERNAL REVENUE SERV., supra note 190, at 25 26.
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[Vol. 66:189
$1000 worth of dental services (a molar root canal) to the electrician.
Taxpayers engaged in bartering transactions such as these face two tax
questions: (1) Must they include in income the goods or services that they have
received; and (2) may they deduct from income the goods or services that they
have provided?
IRS Simplification. The IRS addresses bartering exchanges in several
taxpayer publications. 20 4 Regarding the first question, inclusion in income, in
IRS Publication 525 (Taxable and Nontaxable Income), the IRS states that
taxpayers who receive property or services in a barter exchange "must include
in [their] income, at the time received, the fair market value of property or
services .. receive[d] in bartering."205 In other words, this statement clearly
says that property or services received must be included in income. Regarding
the second question, deductibility, the IRS provides an equally clear statement
of the tax law. Specifically, in IRS Publication 535, the IRS states:
Payments in kind. If you provide services to pay a business expense,
the amount you can deduct is limited to your
20 6 out-of-pocket costs. You
cannot deduct the cost ofyour own labor.
This statement unambiguously informs taxpayers that they may not claim any
tax deduction for the fair market value of their own labor in a barter exchange.
Applying this description of the tax law to the earlier example, the dentist
would have to include in income the $1000 of electrical services received, but
would not be entitled to claim an ordinary and necessary business expense for
the $1000 worth of dental services she provides, since the dental services she
provides would be the "cost of [her] own labor."
Tax Law. The IRS's statement regarding a taxpayer's obligation to include
in income the fair market value of services received in a barter exchange is
correct. Taxpayers are required to include in income not only cash received,
but also "services, meals, accommodations, stock, or other property." 20 7 For
this reason, the dentist who receives electrical services clearly must include the
$1000 of electrical services received in income.
The IRS's statement regarding a taxpayer's inability to deduct the cost of
her own labor would be correct if the taxpayer did not include the value of
204
See INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. No. 525, TAXABLE AND NONTAXABLE
INCOME 20 (2015) [hereinafter PUBLICATION 525]; INTERNAL REVENUE SERV., supra note 3, at 4.
205 PUBLICATION 525, supra note 204, at 20.
206 INTERNAL REVENUE SERV., supra note 3, at 4 (emphasis added).
207 Treas. Reg. § 1.61-1(a) (2016).
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services received in income. For instance, imagine that the dentist and
electrician exchanged labor of equal value. The dentist also had to purchase
some materials to provide the electrician with the molar root canal. Imagine
further that, despite the clear tax law regarding including the electrical services
in income, the dentist fails to include in income the electrical services received.
In this case, the dentist's deduction should be limited to her out-of-pocket
material costs, which, when added onto the value of the services she provided,
exceeded the value of the electrical services received. Put differently, if the
dentist ignored the inclusion of labor income, she should have to ignore the
deduction of labor costs as well.
However, when discussing the deduction question, the IRS fails to explain
that as long as (1) the dentist includes in gross income the $1000 fair market
value of the electrical services that she receives, and (2) the electrical services
are ordinary and necessary expenses for her trade or business as a dentist, she
should be able to deduct $1000 for the fair market value of the dental services
she provides to the electrician (on top of any out-of pocket costs). To illustrate
the reasoning underlying this result, if the electrician and the dentist had each
performed their respective services for one another and also exchanged checks
for $1000, the dentist would be required to include the $1000 received from
the electrician and would be entitled to an ordinary and necessary business
expense deduction for the $1000 provided to the electrician even though the
exchange of checks of equivalent amounts would have been meaningless.
Both judicial decisions and internal IRS memoranda support the deduction
for the value of bartered services when the taxpayer includes the fair market
value of services received. When addressing barter exchanges in Taxpayer
Advice Memoranda, upon the request of an IRS director or area director, the
IRS Office of Chief Counsel has stated that "[w]hen a taxpayer engages in a
barter transaction, the transaction should be treated as if the taxpayer sold its
own product or services at fair market value and then paid fair market value for
the product or services of the other party." 208 In support of this rule, the
memorandum cites several judicial decisions, including United States v.
General Shoe Corp.20 9 and Estate of Wood v. Commissioner.210 Applying this
treatment to the example at hand, the dentist should be treated as selling her
dental services to the electrician, resulting in an inclusion in income of $1000,
208 I.R.S. Tech. Adv. Mem. 200147032 (Nov. 23, 2001).
209 282 F.2d 9 (6th Cir. 1960).
210 39 T.C. 1 (1962).
224
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and then using the proceeds of this hypothetical sale to purchase the
electrician's electrical services, resulting in an ordinary and necessary business
expense deduction of $1000.
Taxpayer Effects. The IRS's presentation of the tax law regarding bartering
exchanges nonetheless suggests to taxpayers that they are not entitled to
ordinary and necessary business expense deductions for the value of their
services provided. Many tax advice websites, popular press stories, and other
taxpayer resources simply restate the IRS's unqualified statement from
Publication 535 that taxpayers are not entitled to deduct the value of their own
labor.2 11 By failing to more fully address the deductibility question in
conjunction with an inclusion in income, as the IRS has done in internal
memoranda, 212 the IRS publications present a potentially misleading
description of the tax law. While this omission has not received substantial
public attention, some accountants have noted that the IRS's description of
bartering transactions reveals that the IRS will "fully disclose ... when to
report income," but will leave it "up to [taxpayers] ... to discover [their]
deductions."' 213 Moreover, the importance of this IRS simplification, if
unchanged, is only likely to grow as more taxpayers turn to barter websites,
such as TaskRabbit, 214 Tradeaway, 215 and other
social media services to use
216
bartering in order pay for business expenses.
b. Early IndividualRetirement Account Distributions
Another example of an IRS description that does not fully explain the tax
law can be found in the IRS publication regarding early distributions from
IRAs. 2 17 As discussed earlier, if taxpayers under age 59 1/2 withdraw funds
from an IRA, such as a § 401(k) plan, they must pay tax on the withdrawn
amount plus a 10% early withdrawal tax penalty, unless certain exceptions
211 See infra note 256 and accompanying text.
212 I.R.S. Gen. Counsel Mem 200411042 (Feb. 6, 2004); I.R.S. Tech. Adv. Mem 200147032 (Nov. 23,
2001).
213 William Brighenti, Tax Deductions of BarterExchanges: BartererBeware of IRS's Posture on Barter
Tax Deductions, ACCOUNTANTS CPA HARTFORD, CONNECTICUT, LLC, http://www.cpa-connecticut.com/
barter-tax-deductions.html (last visited Oct. 2, 2016).
214 TASKRABBIT, https://www.taskrabbit.com/ (last visited Oct. 2, 2016).
215 TRADEAWAY, http://www.tradeaway.com/ (last visited Oct. 2, 2016) ("The World's Largest Barter
Site! Where CASH is NOT always King!").
216 For further discussion, see Shu-Yi Oei & Diane M. Ring, Can Sharing Be Taxed?, 93 WASH. U. L.
REv. 989 (2016).
217 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. No. 590-13, DISTRIBUTIONS FROM
INDIVIDUAL RETIREMENT ARRANGEMENTS (IRAs) 24 25 (2015).
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225
apply. 218 One such exception is that the taxpayer receives distributions from an
IRA in the form of an annuity. Specifically, current law provides that the 10%
early withdrawal tax penalty does not apply to "part of a series of substantially
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the employee or the joint lives (or joint life
expectancies) of such employee and his designated beneficiary." 219 Taxpayers
who desire to withdraw funds from an IRA using an annuity arrangement,
therefore, must determine whether they will satisfy the distribution
requirements for such an annuity.
IRS Simplification. In providing guidance to taxpayers regarding this issue,
the IRS states in IRS Publication 590-B:
You can receive distributions from your traditional IRA that are part
of a series of substantially equal payments over your life (or your life
expectancy), or over the lives (or the joint life expectancies) of you
and your beneficiary, without having to pay the 10% additional tax,
even if you receive such distributions before you are age 59 1/2. You
must use an IRS-approved distribution method and you must
220 take at
least one distribution annuallyfor this exception to apply.
The IRS then goes on to describe three distribution methods, which the IRS
previously approved as distribution methods in IRS Notice 89-25.22 1 Moreover,
the taxpayer publication clearly implies that these are the only IRS-approved
distribution methods. The publication does so by describing one of the three
methods, and then explaining that there are "two other IRS-approved
distribution methods that you can use," followed by a short discussion of
them.222 By negative implication, there would appear to be no other IRSapproved distribution methods. As a result, the publication clearly implies to
taxpayers that, in order to meet the statutory annuity exception, they must use
one of these three distribution methods.
Tax Law. While the IRS publication references three distribution methods
that it has pre-approved and implies that taxpayers must use one of these to
meet the statutory annuity exception, in reality, the IRS has allowed taxpayers
to use additional distribution methods. In several private letter rulings, the IRS
218 I.R.C. §§ 72(t)(1), 408(d)(1) (2012).
219 I.R.C. § 72(t)(2)(A)(iv).
220 INTERNAL REVENUE SERV., supra note 217, at 25 (emphasis added).
221 id.
222 Id.
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223
has approved alternative distribution methods proposed by taxpayers.
Further, in more technical guidance than IRS publications, the IRS has
conceded that taxpayers may use distribution methods other than these three
methods. In this technical guidance, the IRS states that the three methods of
distribution "do not represent the only distribution methods which will satisfy
the requirements of section 72(t)(2)(A)(iv) of the Code." 224 This concession, of
course, is in direct contravention of IRS Publication 590-B.
Taxpayer Effects. This example illustrates how the IRS may create safe
harbors in administrative guidance and then later, in taxpayer publications,
imply-or explicitly state-that these safe harbors represent the only possible
methods for complying with the tax law. By omitting discussion of other
distribution possibilities and including the words "you must, 225 the IRS
dramatically limits the potential distribution options that most taxpayers will
consider. Many taxpayers will only participate in annuity distributions that use
one of the "IRS-approved" distribution methods. Others may choose not to
participate in annuity arrangements if they do not comply with one of the IRSapproved methods. And some taxpayers who participate in IRA annuities that
do not match one of the IRS-approved distribution methods may pay the 10%
early withdrawal tax penalty, even though they are not necessarily required to
226
do so under the tax law.
c.
CharacterizationofActivity as Profit-Seeking
A final example of an IRS simplification that does not fully explain the tax
law is the IRS's description of factors that determine whether an activity
represents a profit-seeking activity.227 Taxpayers are entitled to claim
deductions for ordinary and necessary expenses of their profit-seeking
activities. 228 However, if taxpayers pursue activities that are "not engaged in
for profit," such as hobbies and other recreational pursuits, they may only
deduct expenses to the extent of any income actually generated by these
activities. 229 A key question a taxpayer faces when determining whether to
claim ordinary and necessary expenses, consequently, is whether the
223
2009);
224
225
226
See, e.g., I.R.S.
Priv. Ltr. Rul. 201030038 (May 5, 2010); I.R.S.
Priv. Ltr. Rul. 200943044 (Jul. 28,
I.R.S.
Priv. Ltr. Rul. 9008073 (Nov. 30, 1989).
I.R.S.
Priv. Ltr. Rul. 9008073 (Nov. 30, 1989).
E.g., INTERNAL REVENUE SERV., supra note 217, at 25.
I.R.C. § 72(t) (2012).
227 INTERNAL REVENUE SERV., supra note 3, at 5.
228 I.R.C. § 162(a) (2012).
229 I.R.C. § 183(a) (2012); Treas. Reg. § 1.183-2(b) (2016).
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taxpayer's activity constitutes a profit-seeking
activity, or, alternatively, an
230
activity "not engaged in for profit."
IRS Simplification. The IRS advises taxpayers that a variety of factors
affect whether an activity should be classified as profit seeking. In IRS
Publication 535 (Business Expenses), the IRS includes a list of relevant factors
that taxpayers should consider, such as whether: "[y]ou carry on the activity in
a businesslike manner"; "[y]ou depend on the income for your livelihood";
"[y]our losses are due to circumstances beyond your control (or are normal in
the start-up phase of your type of business)"; "[y]ou change your methods of
operation in an attempt to improve profitability"; and "[y]ou were successful in
making a profit in similar activities in the past."231
Tax Law. Several of the factors in the IRS's taxpayer publication differ
from those listed in the applicable Treasury regulations. For example, the IRS
lists as a factor in IRS Publication 535 whether "[y]ou depend on the income
for your livelihood." 232 The Treasury regulations' discussion of this factor is
more nuanced. The Treasury regulations label this factor as "[t]he financial
status of the taxpayer," and describe, for instance, that:
Substantial income from sources other than the activity (particularly
if the losses from the activity generate substantial tax benefits) may
indicate that the activity is not engaged in for profit especially if there
are personal or recreational elements involved.233
Compared to this more nuanced approach, the taxpayer publication's simpler
summary is a much starker inquiry.
Taxpayer Effects. By not fully explaining the factors in the Treasury
regulations, the IRS may cause some taxpayers to conclude that an activity
represents a hobby, while the Treasury regulations may provide the taxpayer
with greater latitude to characterize it as a business.
For instance, imagine that a stay-at home father has recently started a class
for children at the local town center. The class will guide children in how to
launch their own, self-designed initiatives (such as recycling programs or even
money-making businesses). While parents will pay for their children to attend
the class, this activity still results in various expenses, which the father will pay
230 I.R.C. § 183(c) (2012).
231
INTERNAL REVENUE SERV., supra note 3, at 5.
232 Id.
233 Treas. Reg. § 1.183-2(b)(8) (2016).
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for out of pocket. On a net basis, the father hopes he will make a little profit
from the class, but, regardless, almost all of his family's income will still come
from his wife's job.
If the father looks solely to IRS Publication 535 to determine whether his
expenses from running this class are deductible, he may conclude they are not.
'
He does not "depend" on the income from the class for his "livelihood."234
He
expects to make only a small amount from the class, and his wife's salary will
continue to provide for his family's needs. However, if the father applied the
more nuanced inquiry from the Treasury regulations, he may reach a different
conclusion. While he does have substantial sources of income from other
activity (his wife's job), the expenses from the activity are not generating
substantial tax benefits.23 5 There is also a strong argument that the class does
not have substantial personal or recreational elements involved.23 6 Many
people provide classes (such as tutoring or music lessons) to local children as a
source of additional income, rather than as a form of personal recreation.
Applying the Treasury regulation's fuller explanation, therefore, the father may
be more likely to conclude that running the class is a profit-seeking activity,
yielding more beneficial tax treatment for his expenses. In terms of aggregate
impact, especially in light of the vast number of activities that taxpayers could
potentially claim to be "engaged in for profit," IRS descriptions that cause
taxpayers to conclude their activities are hobbies can yield substantial revenue
savings for the government and reduced tax enforcement and litigation costs
for the IRS.
C. Taxpayer Exposure to Simplexity
Individuals regularly encounter the types of simplexity described above
when making decisions regarding whether and how to comply with the tax law.
According to the IRS, approximately 56% of individuals retain the assistance
of third-party advisors to prepare their tax returns and 34% of individuals use
tax preparation software. 237 The remaining 10% of individuals prepare their
annual tax returns without assistance. 238 As this subpart demonstrates, both
234
235
236
237
INTERNAL REVENUE SERV., supra note 3, at 5.
Treas. Reg. § 1.183-2(b)(8).
Id.
Protecting Taxpayers from Incompetent and Unethical Return Preparers: Hearing Before the S.
Comm. on Fin., 113th Cong. (2014) (testimony of John A. Koskinen, Comm'r of Internal Revenue Service),
htt://www.finance senate.gov/imo/media/doc/Koskinen /20Testimony.pdf
238 Id.
2017]
SIMPLEXITY
229
individuals who prepare their annual tax returns without assistance and those
who rely on third-party advisors or other sources for assistance are exposed to
simplexity in IRS publications.
Taxpayers who prepare their own individual income tax returns rely
extensively on IRS publications, and IRS simplifications embedded within
them. Individuals who do not wish to pay an accountant or purchase software
often rely on IRS publications "to assist [them] in meeting their tax
obligations." 239 For example, the instructions that accompany most IRS forms,
such as IRS Form 1040, frequently refer taxpayers to IRS publications that
address the content of the forms using plain language. 240 Further, in 2014, 83%
of taxpayers reported that IRS publications were "very or somewhat valuable"
as a source of tax advice or information. 24 1 Indeed, taxpayers vocally criticized
the IRS's 2015 announcement that, as a result of budget cuts, the agency
would
242
no longer deliver printed copies of IRS publications to public libraries.
Likewise, taxpayers who rely on other individuals or services to prepare
their tax returns are also affected by the IRS simplifications. These taxpayers
consult sources such as commercial tax preparation software, tax accountants
and tax return preparers, secondary source publications, and the IRS itself As
the following examples illustrate, taxpayers who receive advice from these
sources are often indirectly exposed to the simplexity of IRS publications.
Tax PreparationSoftware. Each year, over forty million U.S. taxpayers use
commercial tax preparation software, such as Intuit's TurboTax, to complete
and file their tax returns. 243 In addition to noting that "IRS publications can
help fill in the gaps and ease your frustrations when preparing your tax
return," 244 TurboTax provides users with access to more than 700 tax
239 TREASURY INSPECTOR GEN. FOR TAX ADMIN., REFERENCE No. 2011-40-070, THE INTERNAL REVENUE
SERVICE PROVIDES HELPFUL AND ACCURATE TAX LAW ASSISTANCE, BUT TAXPAYERS EXPERIENCE LENGTHY
WAIT TIMES TO SPEAK WITH ASSISTORS 21 (2011).
240 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, CATALOG NO. 2481 IV, 1040 INSTRUCTIONS 18
(2015) ("For details, see Pub. 501.").
241 IRS OVERSIGHT BOARD, 2014 TAXPAYER ATTITUDE SURVEY 15 (2014).
242 See Tax Forms Outlet Program (TFOP), INTERNAL REVENUE SERV., https://www.irs.gov/uac/taxforms-outlet-program-tfop (last updated Oct. 3, 2015). While taxpayers may still print copies of the IRS
publications themselves at public libraries for a per-page fee, some critics responded that the change in policy
will result in an "unfair burden" and "inconvenien[ce]." James Niedzinski, IRS Cuts Back on Distributionof
Tax Forms, EAGLE-TRiBUNE (Jan. 23, 2015), http://www eagletribunecorm/news/new hampshire/irs-cutsback-on-distribution-of-tax-forms/article al 3fc2 lf-68d8-5507-9653-5c544fec3eea.html.
243 See ProtectingTaxpayers, supra note 237.
244 Video: What Are IRS Publications?, INTUIT TuRBOTAX, https://turbotax.intuit.com/tax-tools/taxtips/IRS-Tax-FormsVideo
What-Are-IRS-Publications-/INF14668.html (last visited Oct. 2, 2016).
230
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professionals who frequently restate the IRS simplifications through online and
telephone advice. 245 For instance, just as the IRS notes that refinancing points
related to a home mortgage must be amortized without acknowledging
contradictory case law, 246 TurboTax advisors inform users that "you can
deduct the points you pay to get the new loan over the life of the loan."247 As
another example, TurboTax advisors repeat the IRS's administrative gloss that
an ordinary and necessary business expense is one that is "common and
accepted" in the taxpayer's industry, despite the lack of uniform judicial
treatment of this issue. 248 TurboTax states that users' expenses "must be what
the IRS calls 'ordinary and necessary.' This means the item or service is
common and accepted in your line of work and is appropriate and helpful to
your job." 249 The reference to the IRS leaves little doubt that, in crafting this
description of the test for the deductibility of business expenses, TurboTax
advisors have drawn directly on IRS Publication 535, discussed earlier.250 As
these examples reveal, taxpayers who use TurboTax often receive advice that
reiterates IRS simplifications.
The fact that commercial tax preparation software, like TurboTax, often
reiterates IRS simplifications is not surprising. The firms that sell such
software have incentives to encourage their customers to adopt the IRS's
approach. Intuit, for instance, provides purchasers of TurboTax with an
"[a]udit [s]upport [g]uarantee. "251 The TurboTax user agreement provides that
if the user is subject to an IRS audit, Intuit will provide free audit guidance
252
from a trained tax professional, who will answer all audit-related questions.
If the user is not satisfied with this audit support guidance, Intuit will refund
the user's purchase price paid for the TurboTax software.25 3 As a result of this
guarantee, increased IRS audits of TurboTax users pose a threat to Intuit's
245 See Margaret Collins, TurboTax Offers Live Tax Advice to Lure Clentsfrom H&R Block, BLOOMBERG
TECH. (Feb. 14, 2012, 12:01 AM), htt://www.bloomberg.com/news/articles/2012-02-14/turbotax-army-oftax-guides-offers-free-aid-to-lure-clients-from-h-r-block.
246 See supra notes 136 41 and accompanying text.
247 Deducting Mortgage Interest FAQs, INTUIT TURBOTAX, https://turbotax.intuit.com/tax-tools/taxtips/Home-Ownership/Deducting-Mortgage-Interest-FAQs/1NF12051.html
(last visited Oct. 2, 2016)
(emphasis added).
248 See supra notes 119 26 and accompanying text.
249 Jeremy Vohwinkle, What Are Job-Related Tax Deductions?, INTUIT TURBOTAx (Apr. 9, 2012),
http://blog.tutbotax.intuit.com/tax-deductions-and-credits-2/what-are-job-related-tax-deductions-9307/.
250 See supra notes 115 18 and accompanying text.
251 Audit Support Guarantee, INTUIT TuRBoTAx, https://tutbotax.intuit.com/corp/guamnteesjsp
visited Oct. 2, 2016).
252 Id.
253 Id.
(last
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SIMPLEXITY
bottom line. Since taxpayers who adopt the IRS's approach likely face a lower
risk of IRS audit, Intuit has a strong economic motivation to encourage its
users to adopt these positions, even when they are less taxpayer-favorable than
the underlying tax law.
Tax Accountants and Return Preparers.While certified public accountants
and other tax return preparers are more knowledgeable than individuals with
no tax expertise, they are nonetheless also affected by the simplexity in IRS
publications. For example, while some accountants have questioned 254 the
IRS's statement in IRS Publication 535 that taxpayers "cannot deduct the cost
of [their] own labor" 255 in bartering exchanges, many have repeated this
statement in their advice to current and prospective clients. Some rephrase the
IRS simplification (e.g., "[t]he cost of your own labor is not a business
expense-because you did not pay anyone for it" 256). Others repeat the IRS's
own language that deductions are limited to out-of-pocket expenses rather than
labor.257 As another illustration, some tax accountants reiterate the IRS's
statement in IRS Publication 523, described earlier, 258 that taxpayers may only
claim the principal residence gain exclusion if they have experienced a
"significant financial difficulty." 259 These advisors' use of the term
"significant," rather than the Treasury regulations' use of "material," confirms
that they have parroted the language from the IRS publication in their advice to
clients. 260 And certified public accountants regularly define terms and explain
issues by referring clients to specific IRS publications. 26' Third-party tax
advice, especially from accountants and tax return preparers, thus frequently
reinforces the simplexity of IRS publications.
254 See, e.g., Brighenti, supra note 213.
255 Supra note 206 and accompanying text.
256 Where Do I Deduct All My Business Expenses?, IRS HELP MICHAEL PLAKS, EA (Mar. 23, 2016),
http://www.michaelplaks.com/business-taxes/business-expenses.
257 See, e.g., Rachel Brenke, Tax Issues with Bartering Photography Services, THELAWTOG (Mar. 24,
2015), http://www.thelawtog.com/tax-issues-with-barteing-photography-services/;
Tips for Bartering,
TAxACT, https://www.taxact.com/tax-information/tax-topics/tips-for-bartering.asp (last visited Oct. 2, 2016).
258 See supra notes 173 80 and accompanying text.
259 INTERNAL REVENUE SERV., supra note 173, at 5; see, e.g., WilIMc1, Comment to Would My Work
Situation Qualifyfor House Sale Tax Exemption?, H&R BLOCK: THE COMMUNITY (Aug. 16, 2015, 1:18 PM),
http://conununity.hiblock.com/t5/All-Things-Tax/Would-my-work-situation-qualify-for-House-Sale-taxexemption/td-p/67789#.Vg3UQVIVhHx.
260 See supra notes 177 80 and accompanying text.
261 See, e.g., Jason Blumeron, What Expenses Can I Deduct in My Business (Perthe IRS)?, PartI of 3,
BLUMER (Jun. 24, 2014), https://www blumercpascoim/blog/what-expenses-can-i-deduct-in-my-business-perthe-irs-part-l-of-3 ("These are define[d] in Publication 535 from the IRS.').
232
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Structural causes also explain why many accountants and tax return
preparers rely on IRS publications. Accountants and tax return preparers
receive professional training that relies heavily on IRS publications. The
certification exam for certified public accountants frequently includes
questions regarding specific IRS publications. 262 Likewise, in creating a
"return preparer competency exam" for individual tax return preparers, the IRS
recently announced that it would allow individuals taking this exam to have
"electronic access to IRS Publication 17, Your FederalIncome Tax, during the
proceedings."' 263 And every IRS-enrolled agent, the highest credential awarded
by the IRS, must demonstrate extensive knowledge of IRS publications.
Individuals who seek this special status must pass a three-part comprehensive
exam prepared by the IRS. 64 The IRS advises individuals taking this
examination to review several IRS publications, including IRS Publication 17
(Your Federal Income Tax) and IRS Publication 535 (Business Expenses),
among several others. 265 As a result of their training and certification
requirements, accountants and tax return preparers regularly consult IRS
publications as a source of the tax law.
Secondary Sources. Taxpayers are also indirectly exposed to the IRS's
statements in IRS publications through secondary source tax advice
publications. For example, J.K Lasser's Your Income Taxes, one of the bestselling annual tax return preparation publications, contains dozens of
references to specific IRS publications in support of the guidance described.266
Other popular tax return preparation publications contain direct references to
the IRS simplifications (e.g., "According to IRS Publication 535 . . . , a
business expense must be . . . ,,).267 And even the secondary resources that tax
accountants and lawyers use restate IRS simplifications as though they are law.
As an example, Bloomberg BNA's Tax Management Portfolios, which are
often consulted by tax professionals, contain statements such as "given the IRS
262 See, e.g., CPA CPE Tax Courses, PLATINUM PROF. SERVS., https://www.platinumcourses.com/course/
category.phpid-1 (last visited Oct. 2, 2016) ("Using actual IRS Publications, a series of 145 questions will
guide you through each tax subject .. ").
263 Michael Belier, IRS Will Hold Off on PreparerFingerprintingRequirements, 133 TAX NOTES 808,
809 (Nov. 14, 2011).
264 Enrolled Agent Information, INTERNAL REVENUE
SERV., https://www.irs.gov/tax-professionals/
enrolled-agents/enrolled-agent-information (last updated Apr. 22, 2016).
265 See INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. NO. 1470, PACKAGE FOR THE SPECIAL
ENROLLMENT EXAMINATION 7 (1993).
266 J.K. LASSER'S YOUR INCOME TAX 2014 (Prof'l ed. 2013).
267 MARTHA MAEDA, HOW TO OPEN & OPERATE A FINANCIALLY SUCCESSFUL INDEPENDENT RECORD
LABEL 84 (2012).
SIMPLEXITY
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position announced in IRS Pub. 936, caution is warranted in deducting
capitalized points where the same lender provides the new financing." 268 The
simplexity that originates in IRS publications thus spreads to individuals
through influential secondary source publications.
IRS Taxpayer Assistance. Finally, IRS representatives who directly assist
individuals in preparing their annual tax returns reiterate descriptions from IRS
publications. IRS representatives who assist taxpayers at taxpayer assistance
centers and over the IRS help line receive special training in the "publication
method., 269 When individuals approach these representatives with a question
about their tax returns, the publication method requires the representatives to
"obtain the appropriate publication, discuss specific information related to the
topic, ask appropriate questions to obtain facts, and respond to the taxpayer's
issue or question. " 27° When addressing individual taxpayers' requests, these
representatives quote from or refer individuals to IRS publications that contain
IRS simplifications. 271 Further, in the past, if so requested by taxpayers, IRS
representatives at taxpayer assistance centers would complete qualified
individual taxpayers' returns for them.272 When completing such returns, the
IRS required its taxpayer assistance representatives to use existing IRS
publications when determining taxpayers' eligibility for various deductions
273
and credits.
As this discussion illustrates, individual taxpayers are continually exposed
to the simplexity in IRS publications, whether they prepare their tax returns
directly, utilize tax return preparation software, or seek assistance from
accountants and professional tax return preparers. This pervasive exposure
means that the IRS has significant power to shape taxpayers' views of the tax
law through IRS publications. Whether and how the IRS should possess and
exercise this power is an important question that the next Part will address.
268 Tax Implications of Home Ownership, TAX MGMT. PORTFOLIO (BNA) 594 (2013).
269
See TREASURY INSPECTOR GEN. FOR TAX ADMIN., REFERENCE NO. 2004-40-025, IMPROVEMENTS ARE
NEEDED TO ENSURE TAx RETURNS ARE CORRECTLY PREPARED AT TAXPAYER ASSISTANCE CENTERS 11
(2003).
270 Id.
271
See TREASURY INSPECTOR GEN. FOR TAX ADMIN., supra note 239, at 21.
272
id.
Id. Budget cuts have caused the IRS to suspend such programs temporarily. I.R.S. News Release IR-
273
2015-97 (July 15, 2015), https://www.irs.gov/pub/irs-news/IR-15-097.pdf
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III. Is SIMPLEXITY SOUND?
Should the IRS use plain language to explain complex, often ambiguous
tax law to the public? As this Part argues, while simplexity offers a number of
potential tax administration and compliance benefits, it can also threaten vital
values of democratic governance and fairness. Fundamentally, unearthing the
concept of simplexity lays bare a trade-off between understandability and
accurate representation of the law. While there is no simple way to resolve this
trade-off, recognizing that it exists makes it possible to evaluate whether
simplexity is too high or too low in a given situation. After highlighting the
trade-off at stake, this Part considers several strategies for making simplexity
more apparent (thereby making it easier to evaluate it in a given case), which
can also help maximize the benefits of simplexity while minimizing its
drawbacks. This Part then concludes by predicting the likely emergence of
simplexity in several oft-discussed future tax compliance initiatives:
government-prepared tax returns, interactive tax return filing, and increased
third-party reporting.
A. Benefits
Simplexity offers a number of potential tax compliance and administration
benefits: it enables the IRS to summarize complex tax law in understandable
terms for many taxpayers, reveals the IRS's likely litigating positions to the
public, and supports the government's efforts to raise tax revenue.
1. Tax Law in PlainLanguage
Where they describe the tax law accurately, IRS simplifications can help
taxpayers understand the tax law as it exists in the Internal Revenue Code,
Treasury regulations, case law, and other authorities. For example, if an
individual receives a cash dividend from a public corporation, the individual
will need to determine whether he has held the stock long enough to receive a
preferential tax rate on "qualified dividend income."' 27 4 A review of the
Internal Revenue Code will cause him to read multiple provisions in search of
the answer and to insert figures from one statutory provision into the text of
another provision.27 5 In IRS Publication 17 (Your Federal Income Tax),
however, the taxpayer will read a clear distillation of the law, which states
simply that he must have "held the stock for more than 60 days during the 121274 I.R.C. § 1(h)(ll) (2012).
275 I.R.C. § 1(h)(1 i)(B)(iii) (2012) (directing taxpayers to I.R.C. § 246(c)).
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SIMPLEXITY
235
day period that begins 60 days before the ex-dividend date." 27 6 This shortcut
can enable the taxpayer to complete his tax return more efficiently than if he
consulted the Internal Revenue Code directly, assuming he could even access
the text. Further, this IRS simplification can streamline the inquiry for third
parties who may be assisting taxpayers with their tax return filings, thereby
reducing taxpayers' costs of filing.
2. Visibility into the IRS' Views of the Tax Law
IRS simplifications also reveal the IRS's views of the tax law to taxpayers
and their advisors. Despite their limited status as legal authority, 277 IRS
simplifications provide taxpayers with an advance view of how the IRS would
likely respond to a specific tax position during audits or litigation. Especially
in situations where the statutory text is ambiguous, such as the meaning of
"ordinary" business expenses under § 162(a) of the Code, 278 IRS
simplifications provide insights about the IRS's probable reactions before
taxpayers file their tax returns. Taxpayers can respond to IRS simplifications
by foregoing the tax position at issue, and the potentially resulting tax
controversy, or conversely, by claiming the tax position and preparing to
contest the IRS's interpretation.
IRS simplifications can mirror and help amplify the IRS's duty to disclose
information about the tax system in other contexts. Under § 6110 of the Code,
the IRS is required to publicly disclose all "written detennination[s]," such as
private letter rulings, tax-exempt determination letters, and technical advice
memoranda, among others. 2 79 Congress enacted this provision to prevent the
IRS from creating "secret law" in internal communications and in private letter
rulings, which would only be accessible to "a few major tax practitioners" who
frequently interacted with IRS officials. 280 IRS simplifications can be seen as
an extension of Congress's desire to prevent the IRS from shielding its own
276
INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, PUB. No. 17, TAX GUIDE 2014, 65 (2015).
277 Taxpayers cannot rely on these statements as legal authority (though they may raise their reliance as a
defense to certain tax penalties, see Treas. Reg. § 1.6664-4(a) (2014)). See Adler v. Comm'r, 330 F.2d 91, 93
(9th Cir. 1964); Miller v. Comm'r, 114 T.C. 184, 195 (2000); Zimmerman v. Comm'r, 71 T.C. 367, 371
(1978). For a recent discussion, see Cauble, supra note 41. But see Shapiro, supra note 41 (offering contrary
arguments).
278 See supra notes 112 26 and accompanying text.
279 I.R.C. § 6110 (2012).
280 OFFICE OF TAX POL'Y, DEP'T OF THE TREASURY, 1 REPORT TO THE CONGRESS ON SCOPE AND USE OF
TAXPAYER CONFIDENTIALITY AND DISCLOSURE PROVISIONS 27 (2000); see also S.REP. NO. 94-938, at 305 (2d
Sess. 1976).
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EMORY LAW JOURNAL
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legal interpretations from public view. While many forms of written
determinations, such as Chief Counsel Advice memoranda, state the IRS's
view of the tax law in technical terms understandable to tax lawyers and
experienced accountants, 281 IRS simplifications present the IRS's views to the
public.
IRS simplifications can also help ensure that the IRS's own employees
administer the law in accordance with high level, centralized views of it. As
scholars have argued, agencies function more effectively "when central
officials can advise responsible bureaucrats how they should apply agency
law. '28 2 The IRS has nearly 90,000 employees 283 and IRS publications explain
the agency's view of the tax law to many of its employees who must
administer the tax law. Whether the employees provide taxpayer service
through the IRS help line or review returns in field offices, the IRS regularly
directs these employees to IRS publications rather than the Internal Revenue
Code or Treasury regulations.
3. Administration and Revenue Benefits
Last, IRS simplifications can reduce the cost of tax administration and
potentially result in increased tax revenue. As discussed previously, some IRS
simplifications can cause taxpayers to forego certain tax benefits or to refrain
from pursuing aggressive tax positions. For example, taxpayers who follow
some of the IRS simplifications discussed earlier may alter their tax planning
behavior by foregoing deductions for ordinary and necessary business
expenses, 284 amortizing mortgage refinancing points, 285 capitalizing certain
expenditures, 28 6 declining to enter into leveraged leases, 287 forfeiting the
principal residence gain exclusion, 288 paying the 10% IRA early withdrawal
tax penalty, 28 9 foregoing deductions on barter exchanges, 290 and refraining
281
See About IRS Written Determinations, INTERNAL REVENUE SERV., https://www.irs.gov/uac/About-
IRS-Written-Determinations (last updated Dec. 4, 2015).
282 Peter L. Strauss, Publication Rules in the Rulemaking Spectrum: Assuring ProperRespect for an
EssentialElement, 53 ADMIN. L.REv. 803, 808 (2001).
283 See Jonathan H. Adler, How the IRS Has Changed Since 1974, WASH. POST: VOLOKH CONSPIRACY
(Apr. 2, 2014), https://www.washingtonpost.com/news/volokh-conspimcy/wp/2014/04/02/how-the-irs-haschanged-since-1974/?utm term-.e683f0d395a (discussing former IRS Chief Counsel Don Korb's speech).
284 See supra notes 127 29 and accompanying text.
285 See supra notes 142 43 and accompanying text.
286 See supra notes 165 72 and accompanying text.
287 See supra note 153 and accompanying text.
288 See supra notes 184 87 and accompanying text.
289 See supra notes 217 26 and accompanying text.
SIMPLEXITY
2017]
from claiming losses by characterizing an activity as a hobby rather than a
business, 291 among others. To the extent that these IRS simplifications and
others encourage taxpayers to adopt the IRS's interpretations of the tax law
despite the existence of contrary legal authority, simplexity bolsters the IRS's
ability to raise revenue and reduces its need to expend resources contesting
alternative taxpayer positions.
In addition, some commentators have theorized that the IRS's customer
service efforts, including IRS simplifications, could generate feelings of
reciprocity toward the IRS among individual taxpayers, resulting in increased
voluntary compliance. Scholars such as Kathleen DeLaney Thomas have
contended that by providing taxpayers with increased guidance and other
"user-friendly" taxpayer services, the IRS may encourage taxpayers to report
and pay their tax liability correctly.292 Further, government officials have
reported that if the IRS fails to provide adequate taxpayer service, including in
IRS publications and other sources, individual voluntary compliance will erode
over time. 293 These assertions suggest that the IRS's use of plain language, an
act of taxpayer service, could cause some individual taxpayers to reciprocate
294
the IRS's service by increasing their own tax compliance.
B. Threats
Despite the potential tax administration benefits of simplexity, it can also
promote opacity rather than transparency regarding the tax law and lead to
inequitable benefits and burdens among different taxpayers who act on IRS
simplifications in ways that, in each case, are unlikely to be policed effectively
by administrative law.
1. Reduced Tax Transparency
In contrast to the objective of Sunstein and others of using plain language
to increase open government, 29 1 simplexity can diminish, rather than promote,
tax transparency. Tax transparency can be defined broadly as the government's
290
291
292
293
294
See supra notes 211 16 and accompanying text.
See supra note 236 and accompanying text.
Thomas, supra note 32.
NAT'L TAXPAYER ADVOCATE, supra note 9, at 36.
See, e.g., Susan Cleary Morse, The How and Why of the New Public Corporation Tax Shelter
Compliance Norm, 75 FORDHAM L. REV. 961 (2006); Dennis J.Ventry, Jr., Cooperative Tax Regulation, 41
CONN. L.REV.431 (2008). For a contrasting view, see Osofsky, supra note 38.
295 See supra notes 75 92.
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openness to the public regarding its tax rules, agency interpretations, decisionmaking processes, and enforcement practices.29 6 Simplexity can result in
opacity rather than transparency of the tax law and tax administration in two
ways. First, in terms of process, as a result of inadequate signaling of changes,
explanations, and disclosure, the public cannot easily observe whether and why
the IRS has used simplifying language to recast the tax law. Second, in terms
of effect, ironically, simplexity may obscure individuals' knowledge of the
underlying tax law, as it exists in the Internal Revenue Code, Treasury
regulations, and case law.
Changes. When the IRS simplifies the tax law in IRS publications, it
provides virtually no signal to the reader that it has made changes to the
underlying tax law or that it has described its own view of the applicable tax
law. For example, the IRS does not indicate in IRS Publication 525 that its
explanation regarding bartering deductions directly contradicts applicable tax
law or the IRS's own internal memoranda on the topic. 297 The absence of
signals of changes to the underlying tax law in IRS publications differs starkly
from government transparency in other areas. In both houses of Congress, bills
that amend the law must provide a "comparative print," which highlight how
the bills strike out existing text and insert new text.298 As one legislative
official has described the rationale for these rules, the "comparative print can
' 299
be of great aid in ascertaining the intended effect of amendatory legislation."
Similarly, when issuing final regulations, the Treasury explicitly describes
changes made to "previously issued guidance," including prior proposed
regulations.30 0 Because these types of overt signals are not present in IRS
publications, many readers cannot observe that the IRS has made changes to
the tax law.
Explanation. In addition to failing to highlight when it has used an IRS
simplification to recharacterize the tax law, the IRS also fails to provide an
296 See JOHN RAWLS, A THEORY OF JUSTICE 14 15 (rev. ed. 1999); Mark Fenster, The Opacity of
Transparency, 91 IOWA L.REV.885, 888 910 (2006); Frederick Schauer, Transparencyin Three Dimensions,
2011 U. ILL. L.REV.1339; Jeremy Waldron, Accountability: Fundamentalto Democracy 11 (N.Y.Univ. Sch.
of Law Pub. Law & Legal Theory Research Paper Series, Working Paper No. 14-13, 2014), http://papers. ssm.
com/sol3/papers.cfm?abstract id-2410812.
297 See supra notes 208 10 and accompanying text.
298 See RICHARD S. BETH, CONG. RESEARCH SERV., How BILLS AMEND STATUTES (2003),
https://fas.org/sgp/crs/misc/RS20617.pdf (describing House Rule XIII, cl.3(e)(1) (the "Ramseyer Rule") and
Senate Rule XXVI, 12 (the "Cordon Rule")).
299 Id. at 2.
300 See, e.g., T.D. 9655, 2014-9 I.R.B. 541, 541-42 (2014) (Shared Responsibility for Employers
Regarding Health Coverage).
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SIMPLEXITY
239
explanation for the IRS simplification to the reader. The lack of an explanation
again differs from the government's actions in other tax contexts. For instance,
following the enactment of tax legislation, the Joint Committee on Taxation
issues a report that describes present law, the newly enacted provision, and,
importantly, the reasons for change to existing tax law.3' The IRS also
provides significantly more explanation for its change in legal interpretations
and new policies in other publicly disclosed documents. When announcing a
new legal interpretation through the issuance of a Revenue Ruling, the IRS not
only identifies the change, but also explains the rationale. For example, when
adopting a new interpretation of the terms "married" and "marriage" in
Revenue Ruling 2013-17, the IRS explained that its motivation for the change
was to apply "the most natural reading" of the terms in light of the Supreme
Court's decision in United States v. Windsor.30 2 Similarly, when the IRS
determines that it will not follow a particular judicial decision, it publicly
announces its "nonacquiescence" and its rationale for this position in an Action
on Decision. 30 3 While most individuals have far more direct contact with IRS
publications than with Revenue Rulings or Actions on Decision, IRS
publications offer no comparable explanation for the IRS's interpretations that
differ from underlying tax law or judicial decisions.
Disclaimer. Most IRS simplifications are unaccompanied by explicit
disclaimers from the IRS. The IRS provides a statement on the cover of IRS
Publication 17 (Your Federal Taxes) that "the information given [by the IRS]
does not cover every situation and is not intended to replace the law or change
its meaning." 30 4 However, this disclaimer is not sufficient to alert taxpayers to
potential changes to the tax law in many cases. First, the disclaimer quoted
above appears on the cover of IRS Publication 17, but does not appear in any
of the other IRS publications. As illustrated in Part II, such publications
contain numerous IRS simplifications. 30 5 Instead, these other publications
contain introductory language such as the following from IRS Publication 535
(Business Expenses): "This publication discusses common business expenses
301 See, e.g., JOINT COMM. ON TAXATION, JCS-2-13, GENERAL EXPLANATION OF TAX LEGISLATION
ENACTED INTHE 112TH CONGRESS (2013).
302 Rev. Rul. 2013-17, 2013-38 I.R.B. 201 (2013).
303 See, e.g., Actions Relating to Decisions of the Tax Court, 2013-32 I.R.B. (Aug. 5, 2013).
304
INTERNAL REVENUE SERV., supra note 276, at 1.
305 See INTERNAL REVENUE SERV., supra note 3 (no disclaimer); INTERNAL REVENUE SERV., supra note
130 (no disclaimer); INTERNAL REVENUE SERV., supra note 173 (no disclaimer); INTERNAL REVENUE SERV.,
supra note 190 (no disclaimer); PUBLICATION 525, supra note 204 (no disclaimer); INTERNAL REVENUE SERV.,
supra note 217 (no disclaimer).
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and explains what is and is not deductible."30 6 Second, even though the IRS
provides a disclaimer in one IRS publication, it still fails to signal to the reader
that a specific statement deviates from the tax law or relevant case law. Indeed,
even IRS Publication 17, which is 286 pages in length, contains only one
disclaimer that is not associated with any specific text.30 7 By contrast, when the
IRS issues an Action on Decision, it refers to the relevant judicial decision in
30 8
order to focus the reader's attention on the issue in controversy.
Additionally, when various secondary sources adopt IRS simplifications, they
provide no disclaimer. As a result, the single disclaimer on the cover of IRS
Publication 17 does little to illuminate specific IRS simplifications.
The effect of such opacity is that IRS simplifications can ironically
decrease taxpayers' knowledge of the actual tax law, as it exists in the Internal
Revenue Code, Treasury regulations, and case law. While taxpayers could
theoretically reject statements in IRS publications and research the underlying
tax law, the purpose of these statements is to ensure that many taxpayers and
advisors need not access the underlying tax law to determine tax liability or
answer questions. Indeed, the lack of notice or explanation of the changes, and
limited disclosure, means that most taxpayers do not know that the IRS
simplifications differ from the underlying law.
Public knowledge of the government's actions in enacting and applying the
law-including the tax law-is an essential feature of democracy. 30 9 By
diminishing the public knowledge of the tax law and tax administration,
simplexity threatens two attributes of democratic governance: public debate of
the government's laws and actions and accountability of the government to the
public.
Simplexity inhibits the readiness of the public to debate the actual tax law.
For example, while Congress included the terms "ordinary and necessary" in
§ 162(a) to describe a broad group of expenses that may be deducted
immediately, the IRS's presentation of the definition of the term "ordinary"
significantly narrows the meaning of the law. 310 Yet it is possible that Congress
306 INTERNAL REVENUE SERV., supra note 3, at 1 (emphasis added).
307 See INTERNAL REVENUE SERV., supra note 276, at 1.
308 See Actions Relating to Decisions of the Tax Court, supra note 303 (statement of nonacquiescence
regarding Media Space, Inc. v. Comm'r, 135 T.C. 424 (2010), vacated,477 Fed. Appx. 857 (2nd Cir. 2012)).
309 See, e.g., Letter from Thomas Jefferson to Charles Yancey (Jan. 6, 1816) ("[I]f a nation expects to be
ignorant & free, in a state of civilisation, it expects what never was & never will be."); see also RAWLS, supra
note 296; Schauer, supra note 296.
310 See supra notes 115 18 and accompanying text.
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intended to create ambiguity in enacting this statute in order to enable the IRS
and courts to consider many types of expenses as qualifying for deductibility.
As a result of the IRS simplification, public discussion and debate over the
meaning of the terms in § 162(a) may start from a baseline of false clarity
created by the IRS rather than one of intentional ambiguity created by
Congress.
Simplexity also prevents the public from holding Congress accountable for
its tax laws, an important function of tax transparency. 3 1' When the IRS
presents a seemingly clear depiction of complex tax law, the public may not
urge Congress to revisit flawed statutes. For instance, one could argue that the
vague standard set forth by Congress regarding what expenses must be
capitalized may simply be inadministrable. 12 The extensive debate over the
capitalization rules and the voluminous regulations on the topic may suggest as
much.313 However, by offering taxpayers mental shortcuts and rules of thumb,
IRS simplifications create an end-run around such discussion. As a result,
simplexity may prevent Congress from being held accountable for overly
complex tax law.
Additionally, there are few opportunities for the public to hold the IRS
accountable for its role in creating IRS simplifications. Courts only focus on
them in litigation if a taxpayer claims reliance on a statement in an IRS
publication and the IRS disowns the statement. Even in such instances, courts
routinely hold that the IRS cannot be held to its statements in IRS publications,
and therefore do not evaluate them. 3 14 Oversight institutions, such as
congressional committees, are unlikely to question IRS simplifications because
the lack of public knowledge about them prevents the public scrutiny necessary
to engender outside review of the IRS.3 15 And, unlike with Treasury
regulations, 316 no law requires the IRS to provide the public with a notice and
comment period for IRS publications.
311
For discussion of the accountability function, see Waldron, supra note 296. See also Fenster, supra
note 296, at 899 (framing transparency as empowering the public to "monitor government activity").
312 See I.R.C. § 263 (2012) (disallowing a deduction for "[amny amount paid out for new buildings or for
permanent improvements or betterments made to increase the value of any property or estate").
313 See supra notes 160 61.
314 See supra note 277.
315 For a contrasting example, see Robert Costa & Jose A. DelReal, HearingsFloatedas Hill Republicans
Seize on Gruber ObamacareComments, WASH. POST (Nov. 12, 2014, 1:30 PM), https://www.washingtonpost.
corn/news/post-politics/wp/2014/11/12/hearings-floated-as-hll-republicans-seize-on-gruber-obamacarecomments/.
316 5 U.S.C. § 553(b), (c) (2012).
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A potential response to this criticism of simplexity is that its costs are
justified because it enables taxpayers to complete and file their tax returns. For
example, scholars such as Michael Graetz,3 17 Kathleen DeLaney Thomas,3 18
and Lawrence Zelenak 319 have argued that the tax law must not be so complex
that it prevents individuals from embracing their civic duty to report and pay
their taxes correctly. Yet when the IRS offers simplifying descriptions of the
tax law, it may relieve other institutions, namely Congress or the Treasury, of
their obligation to simplify and improve the actual tax law and to do so through
participatory and accountable processes. Simplexity thus often clashes with
democratic values of transparency, accountability, and participation.
2. Unequal Benefits and Burdens
Advocates of plain language have argued that this form of communication
will ensure that taxpayers have equal access to government programs and
services. 32° Yet simplexity can have the opposite effect in the context of tax
planning. As discussed above, some IRS simplifications benefit the
government, while others benefit the taxpayer. 32 1 As this subpart will show,
sophisticated taxpayers can reject IRS simplifications that benefit the
government, while all taxpayers, sophisticated and unsophisticated alike, will
generally follow IRS simplifications that favor taxpayers. As a result,
simplexity creates unequal benefits and burdens.
Most taxpayers can and will adopt pro-taxpayer IRS simplifications. For
reasons discussed previously, most taxpayers will not realize that IRS
simplifications deviate from the underlying tax law, and therefore will
unwittingly follow them. 322 Sophisticated taxpayers may identify certain IRS
simplifications. 323 However, even for such taxpayers, following pro-taxpayer
IRS simplifications will be a safe option. While taxpayers cannot rely upon
these statements as a legal matter in court, 324 most tax returns are never
audited, much less litigated.325 As a result, most taxpayers who follow protaxpayer IRS simplifications will enjoy the benefit of them without any IRS
317
318
319
320
321
322
323
324
325
GRAETz, supra note 72.
Thomas, supra note 32.
Zelenak, supra note 36.
See supra notes 87 90 and accompanying text.
See supra Part III.B.
See supra Part III.B. 1.
See infra text accompanying notes 328 34.
See supra note 277 and accompanying text.
See SarahB. Lawsky,Modeling Uncertainty in Tax Law, 65 STAN. L. REV. 241, 249 50 (2013).
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challenge. As examples such as Bobrow326 reveal, even in the rare instance in
which the IRS challenges a taxpayer for following a pro-taxpayer IRS
simplification and wins, the IRS will only face pressure to concede the issue as
to other taxpayers until the publication is changed.327 As a result, it is rare for
the IRS to audit and challenge a taxpayer's adoption of a pro-taxpayer IRS
simplification. Sophisticated and unsophisticated taxpayers alike therefore will
generally follow and get the benefit of pro-taxpayer IRS simplifications.
Sophisticated taxpayers, however, possess the unique ability to reject IRS
simplifications that benefit the government. Sophisticated taxpayers have
greater access to sound tax guidance, and are therefore less likely to follow
taxpayer-unfriendly guidance offered by the IRS.328 While a wide swath of
taxpayers, even sophisticated taxpayers and their advisors, are exposed to IRS
simplifications, 329 sophisticated taxpayers (or their advisors) are more likely to
look beyond IRS publications and examine the underlying Internal Revenue
Code, Treasury regulations, and case law. They are also more likely to have
access to a broader set of IRS administrative guidance, which may provide
taxpayers with support to reject an IRS simplification that benefits the
government.
Consider the example of the IRS simplification regarding annuity
distributions that avoid the early IRA distribution penalty. 330 As discussed
previously, in technical guidance, the IRS has conceded that the three methods
of distribution set forth in the IRS publication "do not represent the only
distribution methods which will satisfy the requirements of Section
72(t)(2)(A)(iv) of the Code." 33' Indeed, the IRS has issued private letter rulings
allowing particular taxpayers to use distribution methods other than those set
forth in the IRS publication. 332 However, this more technical guidance is not
equally accessible to all taxpayers. Private letter rulings are expensive and
difficult to obtain, and therefore unlikely to be sought by or granted to the
average taxpayer. 333 More generally, both private letter rulings and IRS
326 No.7022-11, T.C.M. 2014-21.
327 See, e.g., supra text accompanying note 199.
328 Cauble, supra note 41, at 427, 429, 451, 463 65; see also Bryan T. Camp, Theory andPractice in Tax
Administration, 29 VA.TAX REv. 227, 264 (2009).
329 See infra Part III. C.
330 See supra text accompanying notes 217 22.
331 I.R.S.
Priv. Ltr. Rul. 9008073 (Nov. 30, 1989).
332 See supra note 223 and accompanying text.
333 See Rev. Proc. 2015-1, 2015-1 I.R.B. 1 (listing requirements for private letter rulings, as well as list of
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Notices are part of a panoply of technical guidance that the IRS issues, which
experienced practitioners routinely access to advise sophisticated clients. 334 In
contrast, less sophisticated taxpayers or advisors are unlikely to access (or
know about) such guidance. 335 Less sophisticated taxpayers therefore access a
much smaller set of choices offered by the simplification in the IRS
publication, such as the simplification that taxpayers must use one of the three
336
distribution methods set forth in the IRS publication to avoid a penalty.
Sophisticated taxpayers therefore enjoy the best of both worlds: the ability to
use taxpayer-favorable IRS simplifications and the ability to reject progovernment IRS simplifications.
Sophisticated taxpayers, with greater awareness of the underlying tax law,
may decide to reject both pro-government and pro-taxpayer IRS
simplifications. To the extent that such IRS simplifications exist in almost
equal measure, the effect on taxpaying may simply net out. However, this
potential netting is unlikely. First, to the extent that pro-government IRS
simplifications are more frequent than pro-taxpayer IRS simplifications,
sophisticated taxpayers rejecting all IRS simplifications would still put
themselves at an advantage relative to the majority of taxpayers who follow
IRS simplifications. Second, by recognizing the more complex rules,
sophisticated taxpayers have the opportunity to reject pro-government IRS
simplifications and embrace pro-taxpayer IRS simplifications, whether or not
they actually do so. This choice is a valuable option, whether or not
33 7
sophisticated taxpayers exercise it.
Scholars have presented a number of scenarios under which the IRS should
screen taxpayers to determine whether they belong to different types, and to
impose different costs on each type. For instance, some scholars have argued
that from an optimal tax theory perspective, the government should require
screening of high- and low-ability taxpayers and impose higher costs on higher
ability taxpayers in order to redistribute most efficiently. 338 Separately, Alex
334
110.6
335
336
337
See BORIS I. BITTKER & LAWRENCE LOKKEN, FEDERAL TAXATION OF INCOME, ESTATES AND GIFTS
(2015) (describing extensive IRS guidance in treatise).
Cauble, supra note 41, at 423.
See supra text accompanying note 220.
Heather M. Field, Choosing Tax: Explicit Elections as an Element of Design in the Federal Income
Tax System, 47 HARV. J. ON LEGIS. 21, 31 32 (2010) (exploring the consequences of allowing choice in tax
planning).
338 See, e.g., George A. Akerlof, The Economics of "Tagging" as Applied to the Optimal Income Tax,
Welfare Programs,and Manpower Planning, 68 AM. ECON. REV. 8 (1978); Kyle D. Logue & Joel Slemrod,
Genes as Tags: The Tax Implications of Widely Available Genetic Information, 61 NAT'L TAX J. 843, 847 49
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245
Raskolnikov has argued that the government should screen between taxpayers
based on their dispositions toward tax compliance and impose different costs
on different taxpayers based on such dispositions.3 39 For instance, by screening
to distinguish between taxpayers who are inclined to comply with the tax
system as long as the government offers helpful service and taxpayers who are
inclined to comply only if the tax penalties are high enough, Raskolnikov
suggests that the government can target helpful taxpayer
service toward the
340
former group and higher tax penalties toward the latter.
However, the inadvertent screening created by IRS simplifications is the
precise opposite of the screening suggested by tax scholars. Sophisticated
taxpayers are generally better off, as a group, relative to other taxpayers. And
yet, because of the enhanced choice not to follow pro-government IRS
simplifications, sophisticated taxpayers will tend to bear less of a burden from
simplexity. In other words, simplexity likely imposes the lowest costs on the
best-off taxpayers. As for Raskolnikov's screening proposal in the tax
compliance context, the opacity of IRS simplifications means that it is not
possible to conclude that taxpayers are choosing to follow them or reject them,
as the case may be, due to their underlying tax compliance dispositions.
Rather, IRS simplifications likely impose greater burdens on less informed
taxpayers, an inequitable result that is not justified by any existing screening
theory.
3. Inadequacy ofAdministrative Law to Police Threats
Can administrative law address the threats to tax transparency and the
inequitable distribution of benefits and burdens that can result from
simplexity? Administrative law, after all, creates a rulemaking framework
designed to ensure that procedures apply to infuse agency pronouncements
regarding the law with public participation and, therefore, democratic
legitimacy. However, despite this promise, administrative law does not
adequately resolve the adverse effects of simplexity.
The administrative law framework, established under the Administrative
Procedure Act (APA), divides agency pronouncements into different
(2008); N. Gregory Mankiw & Matthew Weinzierl, The Optimal Taxation of Height: A Case Study of
UtilitarianIncome Redistribution, 2 AM. ECON. J.: ECON. POLY 155 (2010); David A. Weisbach, Toward a
New Approach to Disability Law, 2009 U. CHI. LEGAL F. 47, 71 82.
339 Alex Raskolnikov, Revealing Choices: Using Taxpayer Choice to Target Tax Enforcement, 109
COLUM. L. REv. 689 (2009).
340 Id.
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categories, which are designed to reflect different levels of influence over the
law. Principally, the APA divides agency pronouncements into legislative rules
and nonlegislative rules.34' Legislative rules can create new legal rights and
duties that bind the agency and the public. 342 Accordingly, agencies must issue
legislative rules through demanding notice and comment procedures, which are
designed to ensure meaningful public participation in the rulemaking process
and judicial review of it.3 43 Nonlegislative rules, which are comprised of
interpretive rules and policy statements, cannot create new legal rights and
duties that are binding on the public. 34 4 Instead, interpretive rules set forth the
agency's own interpretation of existing law, 3 45 and policy statements indicate
34 6
how the agency intends to exercise its discretion with respect to the law.
Given their more limited functions, nonlegislative rules do not have to be
issued through notice and comment procedures. 347 Consequently, regulated
parties should not be compelled to comply with an agency's pronouncement of
new legal rights and duties unless, among other things, 348 the pronouncement is
349
issued through notice and comment procedures.
341
The APA does not apply the terms "legislative rules" and "nonlegislative rules." For discussion, see,
for example, Kristin E. Hickman, Unpacking the Force of Law, 66 VAND. L. REV. 465, 473 n.26 (2013);
Frederic P. Lee, Legislative and Interpretive Regulations, 29 GEO. LJ. 1, 2 (1940). The APA also exempts
other rules, such as procedural rules, from notice and comment procedures. 5 U.S.C. § 553(b) (2012).
342 See, e.g., Chrysler Corp. v. Brown, 441 U.S. 281, 295 (1979) ("[P]roperly promulgated, substantive
agency regulations have the 'force and effect of law."); Prof ls& Patients for Customized Care v.Shalala, 56
F.3d 592, 602 (5th Cir. 1995) ("'[L]egislative rules' are those which create law .. " (quoting Brown Express
v.United States, 607 F.2d 695, 700 (5th Cir. 1979))).
343 See 5 U.S.C. § 553 for the requirements set forth in the APA for issuance of legislative rules. Courts
have elaborated on these requirements significantly. See RICHARD J.PIERCE, JR.,1 ADMINISTRATIVE LAW
TREATISE § 6.1, at 407 (5th ed. 2010).
344 See, e.g., U.S. Dep't of Labor v. Kast Metals Corp., 744 F.2d 1145, 1152 (5th Cir. 1984)
("[Nionlegislative rules do not have the force of law ....
).
345 See, e.g., Paralyzed Veterans of Am.v. West, 138 F.3d 1434, 1436 (Fed. Cir. 1998) ("'Interpretive
rules' ...clarify or explain existing law or regulations . '...");
Gen. Motors Corp. v. Ruckelshaus, 742 F.2d
1561, 1565 (D.C.Cir. 1984), cert. denied, 471 U.S. 1074 (1985).
346 Pacific Gas & Elec. Co. v. Fed. Power Comm'n, 506 F.2d 33, 38 (D.C.Cir. 1974) ("A policy
statement announces the agency's tentative intentions for the future."); U.S. DEP'T OF JUSTICE, ATTORNEY
GENERAL'S MANUAL ON THE ADMINISTRATIVE PROCEDURE ACT 30 n.3 (1947).
34' 5 U.S.C. § 553(b).
348 Issuance of a legislative rule also must occur pursuant to a congressional grant of power. See, e.g.,
United States v. Storer Broad. Co., 351 U.S. 192 (1956). Moreover, in order to be upheld, a legislative rule
must withstand "hard look" review. Motor Vehicle Mfrs. Ass'n v.State Farm Auto. Ins., 463 U.S. 29 (1983).
349 See, e.g., Robert A. Anthony, Interpretive Rules, Policy Statements, Guidances, Manuals, and the
Like Should Federal Agencies Use Them to Bind the Public?, 41 DUKE LJ. 1311, 1314, 1379 (1992);
Michael Asimow, Public Participationin the Adoption ofInterpretive Rules and Policy Statements, 75 MICH.
L. REv. 520, 573 74 (1977) (asserting that notice and comment procedures "facilitate democratic
participation").
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SIMPLEXITY
There are several obstacles to applying this rulemaking framework to IRS
simplifications. First, despite the theoretical clarity of the categories of rules
set forth above, such categories, as applied, have "been described ... as
'tenuous,' 'fuzzy,' 'blurred,' and, perhaps most picturesquely, 'enshrouded in
considerable smog."'350 These general35difficulties
apply with at least equal
1
force in the case of IRS simplifications.
One could make plausible arguments that various IRS simplifications could
fit into any one of the three categories of rules. In terms of nonlegislative rules,
one could plausibly argue that at least some IRS simplifications merely
represent the IRS's own interpretation of the statute, regulations, or judicial
doctrine,352 therefore comfortably fitting in the interpretive rules category. 3' 3
Alternatively, to the extent that an IRS simplification goes beyond merely
interpreting existing law, one could argue that it explains how the IRS intends
to exercise its enforcement discretion and, as such, it is merely a policy
statement. 354 However, relying on various judicial tests for distinguishing
between nonlegislative and legislative rules, one could make a reasonable
argument that at least some IRS simplifications are, in reality, procedurally
invalid legislative rules, rather than either interpretive rules or policy
statements. For instance, one could argue that IRS simplifications (such as the
350
Cmty. Nutrition Inst. v.Young, 818 F.2d 943, 946 (D.C.Cir. 1987) (citations omitted); see also Jacob
E. Gersen, Legislative Rules Revisited, 74 U. CHI L.REV. 1705, 1705 (2007) (referring to "[t]he distinction
between legislative rules and nonlegislative rules" as "one of the most confusing in administrative law").
351 Courts have obliquely addressed IRS simplifications, albeit in cases that were not focused on
administrative law. Adler v. Comm'r, 330 F.2d 91, 93 (9th Cir. 1964); Miller v. Comm'r, 114 T.C. 184, 195
(2000) ("Administrative guidance contained in IRS publications is not binding on the Government .. ");
Zimmerman v. Comm'r, 71 T.C. 367, 371 (1978) ("[A]uthoritative sources of Federal tax law are .. not
in... informal [IRS] publications."). Other courts have held that "IRS publications, though 'aimed at
explaining existing tax law to taxpayers,' do not have the force of law."United States v.Josephberg, 562 F.3d
478, 498 (2d Cir. 2009) (quoting Taylor v.United States, 57 Fed. Cl. 264, 266 (2003)).
352 See, e.g., Robert A. Anthony, A Taxonomy of FederalAgency Rules, 52 ADMIN. L.REv. 1045, 1046
(2000).
353 The disclaimer at the beginning of IRS Publication 17 states that "[t]he explanations and examples in
this publication reflect the interpretation by the Internal Revenue Service (IRS) of Tax laws enacted by
Congress, Treasury regulations, and Court decisions." INTERNAL REVENUE SERV., supra note 276. However,
as discussed earlier, the disclaimer only appears on the cover of Publication 17, creating ambiguity about
whether or not it should carry any weight in characterizing other IRS publications. Moreover, many courts
have concluded that the label
an agency uses certainly is not dispositive. See, e.g., Chamber of Commerce v.
OSHA, 636 F.2d 464, 468 (D.C. Cir. 1980) (concluding that an agency's label is "indicative but not
dispositive').
354 See, e.g., Brock v. Cathedral Bluffs Shale Oil Co., 796 F.2d 533 (D.C.Cir. 1986) (holding that the
Secretary of Labor's enforcement guidelines were mere policy statements). But see, e.g., Cmty. Nutrition Inst.,
818 F.2d at 947 49 (holding that FDA aflatoxin action levels were procedurally invalid legislative rules).
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IRS's description of capitalization requirements)355 that appear to "effectively
amend[] a prior legislative rule" (such as the capitalization regulation)3 5 6 are
procedurally invalid legislative rules.357 Relying on another line of authority,
one could argue that IRS simplifications that transform broad standards into
detailed rules (such as the IRS's specification of required distribution methods
359
358
may be procedurally invalid legislative rules.
for early IRA distributions)
Finally, as another theory, one could rely on a line of judicial authority to
argue that if the IRS treats its descriptions in IRS publications as "for all
practical purposes 'binding,"' 360 then they could be procedurally invalid
legislative rules, even if the IRS does not actually claim that they are legally
binding. 36 1 At bottom, exactly what IRS simplifications are under the APA
depends on which statement is being analyzed and what authority is being
applied.362
Even if it were clear what IRS simplifications are under the APA
framework, it is unlikely that the APA framework would actually be applied in
practice. Imagine, for instance, that IRS simplifications are clearly mere policy
statements. Does this mean that taxpayers will not be compelled to comply
with them? As a legal matter, the answer to this question should be yes.
However, in order to answer yes to this question from a practical perspective,
355
356
357
358
351
See supra notes 158 59 and accompanying text.
Seesupra notes 161 68.
Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 1112 (D.C. Cir. 1993).
See supra notes 217 22 and accompanying text.
Catholic Health Initiatives v. Sebelius, 617 F.3d 490 (D.C. Cir. 2010); see also Hoctor v. USDA, 82
F.3d 165, 171 (7th Cir. 1996). But see, e.g., Mora-Meraz v. Thomas, 601 F.3d 933, 942-43 (9th Cir. 2010)
(holding that the Bureau of Prison's twelve-month rule for meeting a "drug abuse problem" was an interpretive
rule).
360 See, e.g., Appalachian Power v. EPA, 208 F.3d 1015, 1021 (D.C. Cir. 2000). This analysis can easily
swallow up the policy statement category. For this reason, many commentators have critiqued the practically
binding test. See, e.g., PIERCE, supra note 343, § 6.3, at 426.
36i The IRS, at times, treats its statements in IRS publications not only as interpretations or triggers for
enforcement, but as the law itself In briefs, the IRS cites to IRS publications to support its arguments
regarding the law. See, e.g., Answering Brief for the Appellee at 24, Mingo v. Comm'r, 773 F.3d 629 (5th Cir.
2014) (No. 13-60801), 2014 WL 1664220, at *24; Opening Brief for Respondent, Ostrow v. Comm'r, 122
T.C. 378 (2004) (No. 6325-03), 2004 WL 1514961, at * 18 n.6; Brieffor Respondent at 23, Green Forest Mfg.,
v. Comm'r, 85 T.C.M. (CCH) 1020 (2003) (No. 1596-01), 2002 WL 34358358, at *23. Further, the IRS has
argued that a taxpayer's failure to consult IRS publications, or the taxpayer taking a position in conflict with
relevant IRS publications, justifies imposition of an accuracy-based penalty. See, e.g., Brief for the Appellee,
Au v. Comm'r, 482 Fed. App'x 289 (9th Cir. 2012) (No. 11-70270), 2011 WL 2679983, at *3, *15 16; Brief
for Appellee at 47 48, Tavano v. Comm'r, 986 F.2d 1389 (11th Cir. 1993) (No. 91-4078), 1992 WL 12135722
at *47 48; Respondent's Brief in Answer at 13, 30, Bernard v. Comm'r, 104 T.C.M. (CCH) 136 (2012) (No.
5787-10), 2012 WL 5494629.
362 Cf Anthony, supra note 349, at 1331.
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249
taxpayers who access IRS publications to complete their tax returns would
have to actually know that they are mere policy statements. This is unlikely to
be the case for the vast majority of taxpayers, who not only are unlikely to
know what IRS simplifications are from an APA perspective, but also that they
even diverge from applicable tax law.
Some might argue that this compelled compliance as a practical matter
simply means that IRS simplifications are actually procedurally invalid
legislative rules. As a result of this procedural invalidity, this argument would
go, taxpayers could challenge the IRS's failure to use notice and comment
procedures. However, this argument suffers from the flawed assumption that
most taxpayers will be alert to the administrative law categorizations. As
discussed earlier, while a small percentage of well-advised taxpayers may be
prepared to make an APA challenge, the vast majority of taxpayers who access
IRS publications are unlikely to know what the rules are from an
administrative law perspective, much less challenge them as a result of a
purported procedural invalidity.36 3
Even if a taxpayer challenged an IRS simplification in a tax controversy,
the IRS still would not be compelled to revise the IRS simplification for other
taxpayers. The IRS could concede the issue as to the taxpayer in the case
privately, without litigation.36 4 Even if the taxpayer successfully litigated the
case, the IRS could arguably preserve the IRS simplification unchanged on the
grounds that it represents the IRS's own view of the law.
In sum, most taxpayers will comply with IRS simplifications with no
consideration of what they are from an administrative law perspective. As a
result, the administrative law rulemaking framework offers an inadequate
365
solution to the threats of simplexity.
363
A Westlaw search on July 7, 2015 for "IRS /ppublication /p (APA or "administrative law")" revealed
no administrative law challenges to IRS publications. The search did reveal a handful of (rejected) appeals of
criminal tax fraud convictions, in which the defendants claimed that the IRS's failure to subject various tax
forms (such as Form 1040) to notice and comment meant that taxpayers had no duty to file tax returns. See,
e.g., United States v. Hicks, 947 F.2d 1356, 1360 (9th Cir. 1991). That APA challenges to IRS forms by
taxpayers fighting criminal convictions are quite rare underscores the low likelihood of challenges to IRS
publications. In addition, it is difficult for taxpayers to bring a preenforcement challenge. See, e.g., Kristin E.
Hickman, A Problem of Remedy: Responding to Treasury's (Lack ofi Compliance with Administrative
ProcedureAct Rulemaking Requirements, 76 GEO.WASH. L.REv. 1153 (2008).
364 See I.R.C. § 6103 (2012).
365 One possibility might be to subject all IRS simplifications to notice and comment procedures. See, e.g.,
Anthony, supra note 349, at 1315 (suggesting expansive use of notice and comment procedures). We address,
and reject, this possibility. See infra notes 387 93 and accompanying text.
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C. The Trade-Off
Fundamentally, simplexity poses a trade-off between representing the tax
law accurately and presenting it in accessible and understandable terms. In the
context of lawmaking, scholars have examined the optimal complexity, or
precision, of the law. 36 6 They have argued that making the law more complex
can have benefits, in terms of allowing for more fine-grained distinctions,
which may better capture underlying values. 367 However, making the law more
complex can also have costs, including making it less comprehensible and
more expensive to administer. 368 Simplexity poses a similar trade-off. Greater
simplexity results in a less complex presentation of the law. This makes the
law more understandable (and therefore more administrable), but at the cost of
a less accurate reflection of the underlying law. To the extent the underlying
law reflects congressional preferences, greater simplexity may result in less
adherence to the law's underlying preferences.
There is no universal answer to the question of how this trade-off should be
resolved.369 Whether greater or less simplexity should exist depends both on:
(1) how one values accuracy vs. understandability, and (2) whether the existing
level of simplexity is too high or low, given the value placed on accuracy and
understandability. Imagine, for instance, that, instead of explaining the
possibility of claiming itemized deductions, and explaining all such
deductions, the IRS simply states, "[y]ou must take a standard deduction of $X
in the current taxable year." Most would agree that this IRS simplification
overvalues understandability, in that it ignores and obscures a whole slew of
available deductions. In this case, simplexity would be too high. On the other
hand, imagine that the IRS simply copies and pastes the entirety of the
capitalization rules into the relevant IRS publication. Most would agree that
this act would undervalue understandability, in that it would be impossible for
nearly all taxpayers to understand their taxpaying obligations. In this case,
366 See, e.g., Colin S. Diver, The Optimal Precision of Administrative Rules, 93 YALE LJ. 65 (1983);
Louis Kaplow, A Model of the Optimal Complexity ofLegal Rules, 11 JL.ECON. & ORG. 150 (1995); Richard
A. Epstein, The Optimal Complexity of Legal Rules (Univ. of Chi. John M. Olin Program in Law and Econ.,
Working Paper No. 210, 2004).
367 See, e.g., Kaplow, supra note 366, at 150 (positing that more complex rules are more closely tailored,
thereby allowing for better control of behavior).
368 See, e.g., Diver, supra note 366, at 70 71 (discussing, among other things, the trade-off between
accessibility and congruence); Kaplow, supra note 366, at 151 (discussing compliance and enforcement costs
of complex rules).
369 Cf Diver, supra note 366, at 76 ("The degree of precision appropriate to any particular rule depends
on a series of variables peculiar to the rule's author, enforcer, and addressee. As a consequence,
generalizations about optimal rule precision areinherently suspect.").
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simplexity would be too low. Simplexity, therefore, is a characteristic of
descriptions of the tax law, which can be too high or low in a given
circumstance.
Moreover, the benefits and costs of simplexity will vary in different
contexts. 370 For instance, the value of simplexity may be lower (and the
potential costs more pernicious) when describing provisions relevant only to
sophisticated taxpayers, who are least in need of the seemingly simple
explanations, and who will be most capable of manipulating the simplexity. On
the other hand, the value of simplexity may be higher when addressing
provisions likely relevant to particularly unsophisticated taxpayers. Such
taxpayers may have the most to gain from seemingly simple explanations and
may be least likely to manipulate the simplexity. The case for simplexity may
be highest still to the extent that the provisions are unlikely to be relevant to
sophisticated taxpayers at all, thereby eliminating the concern that the
understandability benefits to unsophisticated taxpayers will come with the cost
of differential abilities to manipulate. Other factors may also affect the value of
simplexity. For instance, simplexity may be more problematic when Congress
deliberately intended the complexity of the underlying law to capture
important values. On the other hand, simplexity may be more desirable when
the complexity of the underlying law reflects poor drafting, rather than a desire
to delineate subtle differences in tax treatment.
In short, recognizing the concept of simplexity and its pervasive presence
in IRS Publications opens the door for evaluating whether a desirable amount
of simplexity exists. But determining whether a desirable amount of simplexity
exists must occur through a case-by-case analysis.
D. PotentialResponses
As the prior discussion illustrates, simplexity creates a trade-off between
greater understandability and less accuracy. This subpart offers approaches for
making simplexity more apparent. Doing so will make it easier to evaluate
simplexity in a given case, as well as preserve some of the benefits of
simplexity while responding to its drawbacks.
370 Cf id. at 72 79 (fleshing out how various aspects of rule precision may matter more or less in different
contexts).
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1. Red-Flagging
A strategy for making simplexity more apparent and maintaining many of
the benefits of simplexity while minimizing its threats is to require the IRS not
only to offer government-favorable IRS simplifications, but also to: (1) redflag IRS simplifications explicitly (through footnotes, notations, interactive
online links, appendices, or other means), (2) explain that they represent safeharbor positions, 37 1 and (3) briefly identify other reasonable interpretations of
the tax law. The red-flagging approach has the benefits of allowing the IRS to
explain the tax law in plain language and reveal the agency's view of the tax
law, or at least the view most favorable to the IRS. To the extent that
conservative taxpayers follow the IRS-favorable view, the IRS can still
maximize revenue. Indeed, requiring the IRS to begin by routinely simplifying
in the government's favor may prevent giveaways to taxpayers in the form of
unwarranted pro-taxpayer IRS simplifications. Most importantly, this approach
reduces opacity and may help level the playing field between different types of
taxpayers.
The red-flagging approach should go beyond mere placement of a
disclaimer on each IRS publication regarding the possibility that the
publication contains IRS simplifications. Such disclaimers, even if placed on
all IRS publications, would be inadequate. First, as cognitive bias research has
demonstrated, individuals regularly ignore disclaimers and focus instead on
easily accessible explanations and examples. 372 Drawing from empirical
research conducted in other areas, there are significant reasons to suspect that
general disclaimers would not cause taxpayers to significantly discount the
description of the tax law in all IRS publications. 373 Moreover, even if a
general disclaimer on each publication made taxpayers wary of the guidance in
the publications, the disclaimer would provide taxpayers with no roadmap
371 See Susan C.Morse, Safe Harbors,Sure Shipwrecks, 49 U.C.DAVIS L.REV. 1385 (2016).
372 See, e.g., Nick Ellis, Word Meaning and the Links Between the Verbal System and Modalities of
Perception and Imagery or In Verbal Memory the Eyes See Vividly, but Ears Only Faintly Hear, Fingers
Barely Feel and the Nose Doesn't Know, in MENTAL IMAGES IN HUMAN COGNITION 313, 314 (Robert H.
Logie & Michel Denis eds., 1991); Philip J.Mazzocco & Timothy C. Brock, Understanding the Role of
Mental Imagery in Persuasion: A Cognitive Resources Model Analysis, in CREATING IMAGES AND THE
PSYCHOLOGY OF MARKETING COMMUNICATION 65 (Lynn R. Kale & Chung-Hyun Kim eds., 2006)
(describing the importance of the "vividness" of a story to the salience of images).
373 For behavioral analysis in other areas, see, for example, Yannis Bakos, Florencia Marotta-Wurgler &
David R. Trossen, Does Anyone Read the Fine Print? Consumer Attention to Standard Form Contracts, 43 J.
LEGAL STUD. 1 (2014); W. Kip Viscusi & Richard J.Zeckhauser, Hazard Communication: Warnings and
Risk, in 545 ANNALS AM.ACAD. POL. & SOC. SCI. 106 (1996) (reporting inadequacy of prescription drug
warnings). For a general discussion, see BEN-SHAHAR & SCHNEIDER, supra note 81.
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SIMPLEXITY
regarding what guidance amounted to an IRS simplification and what the
various, possible interpretations of the tax law actually are. As a result, general
disclaimers would, at best, cause taxpayers to disregard IRS publications
entirely, without providing any specific path forward for taxpayers who need
guidance to fill out their tax returns. In contrast, a red-flagging system, with
explanations of the various possibilities in footnotes, notations, interactive
online links, or appendices, could provide constructive, transparent guidance
for sophisticated and unsophisticated taxpayers alike.
The red-flagging approach may have additional benefits. Requiring the IRS
to make different interpretations of the tax law apparent (and highlighting the
pro-government IRS simplification) could create the opportunity to screen to
distinguish between different taxpayers based on which version they choose.
For instance, the IRS-or return preparation software developers 374-- could
present taxpayers with the option of applying the safe harbor version of the law
represented by IRS simplifications, or a more pro-taxpayer version of the law
set forth in the alternatives presented. The IRS may then be able to require
taxpayers to reveal which version of the law they are applying. 375 This
information would provide the IRS with valuable information regarding
compliance profiles, which is lost absent the explicit choice by taxpayers to
follow (or not to follow) simplifications.
The red-flagging approach is not without potential weaknesses. First, redflagging would impose an additional requirement on a resource-constrained
IRS. However, imposing this cost on the IRS may be merited in light of the
resulting increased transparency. Moreover, in drafting IRS simplifications
currently, the agency is presumably already researching the law enough to
reveal both IRS simplifications and the other possibilities. As a result, while
revealing the information already in the IRS's possession would impose some
additional cost, this cost may not be insurmountable.
374 Tax return preparation software companies already charge different amounts for different products
based on the level of tax return complexity. U.S. GoVT ACCOUNTABILITY OFFICE, GAO-09-297, TAX
ADMINISTRATION: MANY TAXPAYERS RELY ON TAX SOFTWARE AND IRS NEEDS TO ASSESS ASSOCIATED
RISKS 3 4 (2009), http://www.gao.gov/assets/290/286461.pdf One could imagine tax preparation software
companies developing different products, which reflect the different versions of the law set forth by the IRS,
and an accompanying insurance market developing based on the version of the law the taxpayer chooses,
thereby resulting in different prices for the different versions.
375 For another proposed screening strategy, see, for example, Raskolnikov, supra note 339, at 718 19,
737 38.
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Some might also object that the red-flagging approach would reduce the
simplicity, and therefore usability, of the IRS's guidance. 376 However, redflagging could be designed in a way that minimizes the increased burden it
imposes. Online versions of IRS publications could have interactive links that
identify IRS simplifications and other possibilities, where applicable. Printed
versions could contain such information in separate supplements.
Red-flagging would create a new screening dynamic, but rather than
screening based simply on how well-advised the taxpayer already is, the new
red-flagging system would screen based on how much the taxpayer cares about
reducing tax liability. Those taxpayers who seek to minimize tax liability can
bear the additional costs of reading interactive links and supplements. Those
taxpayers who wish to avoid added complexity can still do so by not clicking
the interactive links or reading the supplements.
Moreover, while it is easy to criticize red-flagging as increasing
complexity, it is important to remember that the complexity and ambiguity of
the underlying tax law is truly at fault. Maintenance of the status quo is
unlikely to result in simplicity through reform of the actual underlying tax
law. 377 Red-flagging could provide the impetus needed to encourage
378
policymakers to address the complexity and ambiguity of the tax law.
An additional concern, however, is that red-flagging may inadvertently
introduce informational differences between taxpayers who can understand the
information provided by a red-flagging system and those who cannot. 37 9 As
Joe Bankman has pointed out, more than 20% of the population lacks the
ability to engage in tasks such as reading food labels or reading a simple
story. 380 For such taxpayers, the potential benefits of the red-flagging system
would be minimal. Red-flagging may thereby present a new, problematic
screening dimension.
However, this concern is not unique to the red-flagging system. Any tax
system that offers tax planning opportunities is going to uniquely burden those
376
377
CRISIS
378
See, e.g., GRAETZ, supra note 72, at 82 (1997).
Cf Austan Goolsbee, The TurboTax Revolution: Can Technology Solve Tax Complexity?, in THE
IN TAX ADMINISTRATION 124, 128 (Henry J. Aaron & Joel Slemrod eds., 2004).
For example, with mixed success, some countries have created initiatives to rewrite the underlying tax
law in plain language, rather than just creating a veneer of simplifications that overlays an unchanged set of
complex laws. JOINT COMM. ON TAXATION, supra note 71, at 115 17.
379 This can be characterized as a horizontal equity problem, whereby reducing inequity between two sets
of taxpayers can often increase inequity relative to a third set.
380 Bankman, supra note 31, at 1431.
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255
taxpayers who are least capable of understanding it. For example, research
regarding flexible spending accounts reveals that these tax savings vehicles are
more likely to be used by taxpayers with higher education and higher capacity
to make complex assessments. 381 Moreover, that some taxpayers will not have
the capacity to understand or use the red-flagging system cannot justify
continuing to maintain the opacity of IRS simplifications.
Another reasonable objection to red-flagging is that it may create a road
map for taxpayers to be aggressive. However, it is not clear that taxpayers will
respond to red-flagging by being more aggressive. To the extent that protaxpayer IRS simplifications currently exist, taxpayers may unknowingly be
following them already. If the default is set to pro-government IRS
simplifications in the red-flagging system, many taxpayers may simply follow
the default. The red-flagging system will make both the pro-government
simplifications and the other possibilities apparent. However, it is not clear
whether taxpayers will choose such other possibilities or follow the progovernment IRS simplifications. As scholars have noted, taxpayers comply
with the tax law for all sorts of different reasons. 382 Many taxpayers may
simply desire to adopt conservative tax positions and may appreciate the
383
government's presentation of these positions.
Finally, even if a taxpayer would not ordinarily claim an aggressive tax
position, some may argue that red-flagging would highlight the complexity and
ambiguity of the tax law, leading some taxpayers to believe that others are
exploiting it to claim aggressive tax positions. 38 4 This belief may undermine
confidence in the tax system, thereby encouraging taxpayers to take aggressive
positions in anticipation of others doing so as well (a backlash effect). 38 5 This
concern, however, is overstated. It is no secret that the tax system is complex.
381
Roger Feldman & Jennifer Schultz, Who Uses Flexible Spending Accounts: Effects of Employee
Characteristics and Employer Strategies, 39 IED. CARE 661, 661 (2001); Barton H. Hamilton & James
Marton, Employee Choice of Flexible Spending Account Participationand Health Plan, 17 HEALTH ECON.
793, 803-04 (2008).
382 See Michael Doran, Tax Penalties and Tax Compliance, 46 HARV.J.ON LEGIS. 111, 112 (2009);
Raskolnikov, supra note 339, at 696 97; Joel Slemrod, Introduction to WHY PEOPLE PAY TAXES: TAX
COMPLIANCE AND ENFORCEMENT (Joel Slemrod ed., 1992).
383 See, e.g., Doran, supra note 382, at 137 38 (examining how convictions about duty, honesty, and
citizenship may compel compliance for certain taxpayers); Raskolnikov, supra note 339, at 719 (positing that
some taxpayers want to take the conservative tax reporting position).
384 JOINT COMM. ON TAXATION, supra note 71, at 109.
385 Id.; Edward J.McCaffery, The Holy Grail of Tax Simplification, 1990 WIS. L. REV. 1267, 1290
("[P]erception of hopelessly complex and inequitable tax laws .. leads some potentially honest taxpayers to
attitudes of noncompliance.").
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Red-flagging simply may provide a more coherent road map of some of the
complexity and ambiguity.
Alternatively, if red-flagging provides too much information regarding
potential, aggressive positions, an alternative would be to have the IRS simply
annotate its publications with links to all the sources of law that the IRS is
relying upon. These links would also create greater transparency and create
less additional information for taxpayers to read. However, it would also serve
as a less clear source of guidance regarding what, exactly, the alternative
potential tax positions are. Whether red-flagging or annotation is the preferable
approach depends on how easily one wants to allow less-sophisticated
taxpayers to find alternative, more aggressive positions. If putting taxpayers on
equal footing is a particularly important value, then red-flagging should be
preferred over annotation. However, if providing a greater measure of
transparency while making it less likely that taxpayers will take more
aggressive tax positions is more important, annotation should be preferred.
2. Review of-IRS Publications
The exclusive application of a red-flagging system or an annotation system,
however, may not be enough to address the adverse effects of simplexity.
Without oversight or review, the IRS may lack the proper incentives or even
386
ability to create and maintain a sufficiently robust red-flagging system.
Indeed, in some cases the IRS may not fully realize that there are other
available legal positions. In such cases, the IRS would not be able to offer
meaningful red-flagging or annotation. A complementary reform would subject
the IRS's process to outside review.
One possibility for review of IRS simplifications would be to require all
IRS publications to undergo notice and comment procedures. Requiring notice
and comment procedures for all IRS publications, regardless of whether they
are actually interpretive rules or policy statements, could sidestep the difficult
administrative law classification questions discussed previously, and ensure
that the purported democratic legitimacy offered by notice and comment apply
in any event.
386 The IRS's informal mechanisms for receiving feedback regarding its publications do not necessarily
produce meaningful comments. U.S. GEN. ACCOUNTING OFFICE, GAO/GGD-95-34, TAX ADMINISTRATION:
IRS EFFORTS TO IMPROVE FORMS AND PUBLICATIONS 8 (1994). IRS publications are not subject to more
formal processes, such as OMB review. Id. at 3.
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SIMPLEXITY
However, this form of review should be rejected. Even within the
administrative law paradigm, many scholars question how much notice and
comment procedures really do ensure democratic legitimacy, and question
whether the benefits are worth the costs. 38 7 As applied to IRS Publications,
notice and comment is a costly and likely ineffective means of ensuring this
transmission of information from the IRS to the public. However, it may be
useful to enlist the tax law bar and other tax professionals in a less formal
process whereby they can create crowd-sourced (wiki-type) annotations on IRS
Publications. The IRS can review such annotations for accuracy. But, the
annotating process may alert the IRS to various sources of authority of which it
was not aware and help create more accurate simplifications.
As an alternative, a separate organization charged with monitoring the IRS
could review the IRS's red-flagging of its own publications and seek to ensure
that sufficient information is transmitted to the public. A plethora of
organizations is charged with monitoring the IRS, including the IRS Oversight
Board, the Treasury Inspector General for Tax Administration (TIGTA), the
Government Accountability Office (GAO), and the Taxpayer Advocate
Service. 388 Of such organizations, either the TIGTA, or the GAO, or both
389
would be well suited to review the red-flagging of IRS simplifications.
Indeed, both the TIGTA and the GAO have reviewed the IRS's provision of
taxpayer assistance by telephone, the IRS's preparation of low-income tax
returns, and other taxpayer services to assess the quality of the IRS's
387 See, e.g., E. Donald Elliott, Re-Inventing Rulemakng, 41 DUKE L.J. 1490, 1492 93 (1992). Common
critiques include that the public generally has very little engagement with such procedures. See, e.g., Cary
Coglianese, Citizen Participation in Rulemaking: Past, Present, and Future, 55 DUKE L.J. 943 (2006).
Another oft-cited concern is that imposing the extensive procedures on an agency may simply discourage the
agency from issuing guidance altogether. See, e.g., David L. Franklin, Legislative Rules, NonlegislativeRules,
and the Perils of the Short Cut, 120 YALE L.J. 276, 284 (2010). As applied to IRS simplifications, requiring
notice and comment could reduce the volume of the IRS's publications, leaving taxpayers with less useful
guidance.
388 See, e.g., NAT'L TAXPAYER ADVOCATE, supra note 9, at 23 24.
389 In contrast, the Taxpayer Advocate Service and the IRS Oversight Board are unattractive possibilities.
The Taxpayer Advocate Service is charged principally with protecting taxpayers from the IRS. This charge is
at least somewhat in conflict with objective analysis of IRS publications designed to ensure that both progovernment and pro-taxpayer IRS simplifications are identified. Samuel D. Brunson, Watching the Watchers:
PreventingLR.S. Abuse of the Tax System, 14 FLA. TAX REV. 223, 252 53 (2013). The IRS Oversight Board
faces severe resource issues, with six of its nine seats unfilled. Robert M. Tobias, Effective January 1, 2015,
There Are Six Open Seats for IR OversightBoard Members, IRS OVERSIGHT BOARD, http://www.treasury.gov/
IRSOB/about/Pages/default.aspx (last visited Oct. 2, 2016). Moreover, the IRS Oversight Board may not
engage in tax policy decisions. I.R.C. § 7802(C)(ii) (2012).
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[Vol. 66:189
performance as well as to help the IRS develop a sound methodology to
390
evaluate its own service.
Review of IRS publications should be searching to be effective. In the early
1990s, the GAO reviewed IRS publications and such review did not identify
the need for any substantive changes. 39 1 However, the GAO methodology 392
in
this review was quite limited, in that it reviewed only four IRS publications.
Moreover, it is unclear whether the GAO was looking for IRS
simplifications. 393 If the GAO were charged with identifying not only clearly
incorrect statements of the law, but also IRS simplifications, and ensuring that
such IRS simplifications are appropriately red-flagged-with reasonable,
alternative possibilities clearly identified-then the GAO review may serve as
a useful backstop to the IRS's own red-flagging.
3. StructuralReform
In some cases, red-flagging of IRS simplifications, backstopped by review,
may not be a viable option. Aside from IRS publications, the IRS makes
simplifying statements in real-time interactions with taxpayers in other fora.
For instance, the IRS provides extensive advice to taxpayers over the telephone
and in Taxpayer Assistance Centers. 3 94 While the IRS can, and does, prescribe
what types of questions it will answer in certain contexts 3 95 and trains its
employees to answer such questions, 396 the IRS cannot constrain its employees
to stay within these boundaries in all cases, nor can the IRS provide a prepared
390
See, e.g., U.S. GOVT ACCOUNTABIITY OFFICE, GAO 10-225, 2009 TAX FING SEASON: IRS MET
MANY 2009 GOALS, BUT TELEPHONE ACCESS REMAINED Low, AND TAXPAYER SERVICE AND ENFORCEMENT
COULD BE IMPROVED (2009); U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-05-782, TAX ADMINISTRATION:
IRS NEEDS BETTER STRATEGIC PLANNING AND EVALUATION OF TAXPAYER ASSISTANCE TRAINING (2005);
U.S. GEN. ACCOUNTING OFFICE, GAO-01-189, IRS TELEPHONE ASSISTANCE: QUALITY OF SERVICE MDIED IN
THE 2000 FILING SEASON AND BELOW IRS' LONG-TERM GOAL 2 (2001).
391 U.S. GEN. ACCOUNTING OFFICE, GAO/GGD-93-72, TAx ADMINISTRATION: SELECTED IRS FORMS,
PUBLICATIONS, AND NOTICES COULD BE IMPROVED (1993).
392 Id. at 1, 4, 16.
393 Id. at 1, 16.
394 Contact Your Local IRS Office, INTERNAL REVENUE SERV., https://www.irs.gov/help-resources/
contact-your-local-irs-office (last updated July 1, 2016); Let Us Help You, INTERNAL REVENUE SERV.,
http://www irs gov/uac/telephone-assistance (last updated June 21, 2016).
395
TREASURY INSPECTOR GEN. FOR TAX ADMIN., REFERENCE NO. 2005-40-021, CUSTOMER SERVICE AT
THE TAXPAYER ASSISTANCE CENTERS IS IMPROVING BUT IS STILL NOT MEETING EXPECTATIONS 4 (2004).
396 U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-05-782, TAX ADMINISTRATION: IRS NEEDS BETTER
STRATEGIC PLANNING AND EVALUATION OF TAXPAYER ASSISTANCE TRAINING 5 (2005).
SIMPLEXITY
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259
script that will apply to all fact patterns presented.397 For the same reasons that
it is impossible for the IRS to provide a prepared answer to every real-time
question in advance, it is also impossible for the IRS to provide red flags for
every answer provided. In the absence of red flags, it would be problematic for
the employee to believe her role is either pro-government or pro-taxpayer.
Such a view would tend to skew simplifications in one direction or the other.
As a result, employees who provide real-time advice to taxpayers may best
be placed in a new independent taxpayer service organization, which has an
identity as a neutral provider of tax information. For the same reasons that the
Taxpayer Advocate Service's independence from the IRS has been seen as
essential to the institution's ability to advocate on behalf of taxpayers, 398
creating a neutral identity for taxpayer service employees who provide tax
advice to the public may be essential to ensure fair, reasonable advice in the
absence of any of the previously prescribed red flags.
Creating a separate unit of employees either within or apart from the IRS is
certain to impose additional costs, as a result of increasing the infrastructure of
the agency, and the inevitable organizational costs of segregating certain
employees from others. To the extent that the IRS is able to red-flag most
ambiguity that will arise in advance or limit IRS employees' answers to only
situations that do not require simplifications, this last strategy should be
avoided. But separation may be necessary in certain situations. It should serve
as a limit on the types of questions that IRS employees, in the given structure,
should answer. This strategy is likely to become more relevant if the IRS
increases interactivity with taxpayers during the tax return preparation process
in the future, a potential development that is discussed below.
E. The Future of Tax Administration
The IRS's use of plain language to explain otherwise complex tax law is
not restricted to IRS publications, such as those discussed in this Article.
Rather, IRS simplifications appear across the spectrum of taxpayer services.
And if the IRS applies new innovations to aspects of tax administration over
the coming decades, simplexity is only likely to increase. In anticipation of
these possible developments, this subpart briefly forecasts possible emergence
397
U.S. GEN. ACCOUNTING OFFICE,
GAO-01-189, IRS
TELEPHONE ASSISTANCE: QUALITY OF SERVICE
MIED IN THE 2000 FILING SEASON AND BELOW IRS' LONG-TERM GOAL 13 15 (2001); TREASURY INSPECTOR
GEN. FOR TAX ADMIN., supra note 395, at 2, 7.
398 See Camp, supra note 47, at 96.
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of simplexity in some of the most prominent tax administration tax reform
proposals: government-prepared tax returns, interactive tax return filing, and
third-party reporting.
Government-PreparedTax Returns. In recent years, numerous government
officials and scholars have advocated for the adoption of government-prepared
tax returns to promote increased tax compliance and alleviate individuals'
filing costs. 39 9 Under this approach, which has been implemented in
California 400 and outside the United States, 40 1 the taxing authority would
prepare portions of an individual's tax return by inserting information that it
has already received through third-party information reporting, such as salary
and interest payments and family status .402 Taxpayers would have the right to
make revisions to the information contained in the government-prepared tax
return, 40 3 though there is a high likelihood that many would confirm the IRS's
pre-filled return rather than face an increased risk of audit.
In addition to reducing the return-filing burden on many individual
taxpayers, government-prepared tax returns would also present powerful
opportunities for the IRS to apply simplified versions of the tax law directly to
individuals' own personal tax circumstances. For instance, the IRS could
create a default that automatically designates a wage earner's receipt of
additional income that is less than a certain amount, such as $600, as income
earned from a hobby rather than a business activity. This default would serve a
similar role as the IRS's discussion of whether the taxpayer's "livelihood"
depends on the income in the hobby determination rules of IRS
Publication 535.44 As another example, the IRS could automatically allocate a
set percentage of a restaurant's gross receipts, such as 10%, to the gross
income of all waiters who work at the restaurant. 40 5 This default would not be
based on statutory or regulatory authority, but would communicate the IRS's
presumption regarding the restaurant's total tip income. By incorporating
399 See, e.g., Bankman, supra note 31; Goolsbee, supra note 31; Mock & Shurtz, supra note 31; Venty,
supra note 31.
400 See STATE OF CAL. FRANCHISE TAX BD., READYRETURN PIor: TAX YEAR 2004 STUDY RESULTS
(2006), htp://www.ftb.ca.gov/readyReturn/TY04RRFinalReport.pdf.
401 See, e.g., David Wiles, Why Swedes Are Okay with Paying Taxes, SWEDISH INST., https://sweden.se/
society/why-swedes-are-okay-with-paying-taxes/ (last updated Jan. 8, 2016).
402 See STATE OF CAL. FRANCHISE TAXBD., supra note 400.
403 See id.
404 See supra notes 231 36 and accompanying text.
405 Current law contains a similar feature, calculated at 8% of total gross income. I.R.C. § 6053(c) (2012);
Treas. Reg. § 31.6053-3(d) (2012).
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defaults and presumptions in the government-prepared tax return, the IRS
could signal legal outcomes to taxpayers, even if these outcomes are not
necessarily required by the applicable tax law.
Interactive Tax Return Filing. Several scholars have recommended that the
IRS create interactive online mechanisms to assist taxpayers with their tax
return filing obligations and provide them with tailored guidance. 40 6 Currently,
taxpayers who consult IRS publications and tax return forms receive uniform
guidance even though their personal circumstances differ. As Joseph Bankman,
Clifford Nass, and Joel Slemrod have noted, once taxpayers identify as part of
a particular group, such as taxpayers who must file IRS Form 1040 with
Schedule A, "each member receives the identical form with the identical
questions." 407 In response, these scholars argue that the IRS should incorporate
"conversational agents" into e-filing software, which ask specific questions
based on the taxpayer's type of employment, answers to prior questions, and
other factors. 408 They suggest that the conversational agent could also assume
the role of auditor by adjusting the questions to uncover potential tax
noncompliance. 40 9 Likewise, in response to the length and density of current
IRS publications, Kathleen DeLaney Thomas suggests that the IRS could
create user-friendly websites that provide thematically-linked information
on a
410
specific topic, such as tax obligations related to household employees.
Each of these suggestions would reduce procedural complexity associated
with tax return filing, but would also provide the IRS with enhanced
opportunities to shape the tax law through simplexity. The IRS already directs
its taxpayer assistance employees to answer all "in scope" questions from
taxpayers by restating text from particular IRS publications. 411 The proposals
described above would amplify IRS simplifications through more
technologically advanced means. For example, under Thomas's approach, the
IRS could use the household employee website to provide taxpayers with its
own interpretation of otherwise ambiguous legal issues, such as whether an
individual who provides childcare services should be treated as an employee
for tax purposes. 412 Similarly, under the Bankman, Nass, and Slemrod
406 See, e.g., Bankman, Nass & Slemrod, supra note 32; Mock & Shurtz, supra note 31; Thomas, supra
note 32.
407 Bankman, Nass & Slemrod, supra note 32, at 17.
408 Id. at I8.
409 id.
410 See Thomas, supra note 32.
411
TREASURY INSPECTOR GEN. FOR TAX ADMIN., supra note 3 95.
412 See Thomas, supra note 32, at 37 40.
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proposal, the conversational agent could ask taxpayers questions about items
that may not necessarily be subject to tax, such as certain employer
reimbursements, in a way that nevertheless leads the taxpayer to include the
413
amounts in income out of caution.
Third-PartyReporting. The government has increasingly instituted thirdparty information reporting requirements as a means of assessing tax
liability. 4 14 In recent years, and often as a result of legislation, the IRS has
expanded information-reporting requirements to apply to topics as diverse as
offshore bank accounts, 415 health insurance, 416 basis in securities, 417 and
transactions that involve virtual currencies. 418 Studies of individual tax
reporting have found consistently that third-party information reporting
correlates with high levels of tax compliance. 419 As technological progress
continues to enhance the ability of third parties, such as banks or individuals
with children, to comply with information reporting requirements, the
government is likely to increase its use of this tax enforcement device.
While third-party information reporting is an important feature of modern
tax administration, it also provides an outlet for IRS simplifications. Thirdparty information reporting requirements enable the IRS to implicitly advise
taxpayers that they should not engage in specific transactions. For instance, the
"reportable transaction" rules, which require taxpayers and their advisors to
file information reports with the IRS whenever a taxpayer engages in certain
transactions, can signal to taxpayers that they should not engage in these
transactions, even though they are not necessarily inconsistent with applicable
tax law. 420 Further, the IRS could use information reporting instructions to
third parties to add administrative gloss to the underlying tax law. For
example, by providing non-U.S. banks with new indicia of customers who
should be subject to information reporting to the U.S., the IRS could create
413 Bankman, Nass & Slemrod, supra note 32, at 18.
414 For list of current information-reporting requirements, see supra note 33.
415 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, CATALOG NO. 59612Q, 2015 INSTRUCTIONS FOR
FORM 8966 (2015).
416 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, FORM 1095-C, EMPLOYER-PROVIDED HEALTH
INSURANCE OFFER AND COVERAGE (2015).
417 INTERNAL REVENUE SERV., DEP'T OF THE TREASURY, FORM 8949, SALES AND OTHER DISPOSITIONS OF
CAPITAL ASSETS (2015).
4i8 I.R.S. Notice 2014-21, 2014-16 I.R.B. 938.
419 See INTERNAL REVENUE SERV., TAX GAP ESTIMATES FOR TAx YEARS 2008 2010, at 2 (2016),
https://www.irs.gov/PUP/newsrooni/tax22gap%/2Oestimates/2Ofoir2200
/20through222010.pdf.
420 See Treas. Reg. §§ 1.6011-4(a), (b) (2016); see also Joshua D. Blank, Overcoming Overdisclosure:
Toward Tax Shelter Detection, 56 UCLA L. REV. 1629 (2009).
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information-reporting rules that extend beyond the requirements of applicable
tax law.421 An underexplored feature of the information reporting approach,
consequently, is how it can serve as an enhanced platform for IRS
simplifications.
Each of these examples illustrates how the IRS could extend its current
approaches to simplifying the tax law to new tax enforcement and collection
techniques. Simplexity in tax administration will likely only grow as the IRS
increases its interaction with taxpayers through a variety of new initiatives and
technological advances. The potential growth of simplexity underscores the
need for policymakers to consider the strategies of red-flagging, oversight, and,
if necessary, structural reform,422 when considering whether and how to
implement these tax administration proposals in the future.
CONCLUSION
This Article has explored a previously unexamined consequence of
mandating that the government communicate with the public using plain
language that is easy to understand. Plain language advocates assert that
initiatives such as the Plain Writing Act and the IRS's duty to explain will lead
to "simplicity rather than obfuscation." 423 In contrast, we have argued that,
rather than achieving simplicity, the government's use of clear and simple
terms to describe complex legal rules and regulations often yields simplexity.
By examining this effect of the use of plain language, this Article has made
four primary contributions.
First, this Article has introduced the concept of simplexity to the legal
literature. As we have defined it, simplexity occurs when the government
presents clear and simple explanations of the law without highlighting its
underlying complexity or reducing this complexity through formal legal
changes. Conversely, simplicity-a perennial goal of policymakers and
scholars-results when policymakers reform the law by eliminating specific
complex provisions or procedures through the enactment of statutory changes
or issuance of regulations.
Second, this Article has shown that in its numerous taxpayer publications,
the IRS frequently uses plain language to transform complex, often ambiguous
421 For current law, see Treas. Reg. §§ 1.1471-3(b), (c) (2015).
422 See supra Part III.D.
423 SUNSTEIN, supra note 13, at 16.
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tax law into seemingly simple statements that: (1) present contested tax law as
clear tax rules, (2) add administrative gloss to the tax law, and (3) fail to fully
explain the tax law, including possible exceptions. While IRS simplifications
often result in restatements of the tax law that benefit the government, at other
times they appear as recharacterizations that benefit taxpayers.
Third, this Article has considered the normative implications of simplexity.
Simplexity offers a number of tax administration benefits, such as making the
tax law understandable, revealing IRS interpretations of the tax law, and even
bolstering the IRS's ability to collect tax revenue. At the same time, we have
argued that simplexity can also promote opacity rather than transparency
regarding the tax law and lead to inequitable benefits and burdens among
different taxpayers who act on IRS simplifications. Further, administrative law
is unlikely to address each of these threats. Evaluating whether the level of
simplexity is too high or low requires balancing the competing values of
understandability and accuracy in a given context.
Last, rather than advocating for the rejection of plain language in
government communications, we have presented several strategies for
maximizing the tax administration and compliance benefits of simplexity while
minimizing its potential threats. While these possibilities are not exhaustive,
we have outlined three potential approaches: red-flagging or annotating IRS
simplifications, outside review of IRS simplifications, and accompanying redflagging or annotating with structural reform of taxpayer service functions of
the IRS.
While we have argued that simplexity occurs in IRS communications with
taxpayers, and is likely to increase in the future, this concept has broad
application. Administrative agencies throughout the federal government are
now required to use plain language in their official communications with the
public.4 24 When agencies meet this mandate by offering simple explanations
for otherwise complex law, they too exhibit simplexity. As a result, the
analysis and prescriptions presented in this Article should have important
implications not only for government officials and scholars specializing in tax
law, but for those in other legal areas as well.
424 Plain Writing Act of 2010, Pub. L. No. 111-274, 124 Stat. 2861 (2010); SUNSTEIN, supra note 13.